Foreign taxes and health insurance

[Djritxist]

Hello,

My wife has some employment income in Poland, which we need to report in our joint tax return. We understand that foreign income needs to be reported on a gross income basis in Form 1040 as well as Form 1116. I have two specific questions:

1. In Poland, social security contributions are tax deductible (thereby reducing taxable income), whereas in the US they are not. Does this mean that in the US tax return I need to report the Polish gross income before social contributions rather than the Polish taxable income?

2. In the US, we don't report gross income per se; we include W2 wages instead (gross pay less pre-tax 401k contributions less pre-tax medical insurance premia). In Poland, however, health insurance and contributions to private pension plans are NOT tax deductible. As for the treatment in the US tax return, I understand that foreign plans are not qualified under IRS guidance, so we can't reduce foreign gross income with the pension contributions, but I'm not sure about foreign health insurance. Can I reduce the Polish gross income with the health insurance premia similarly to what we do to arrive at W-2 wages in the US? 

Thank you in advance!

[DaveF1006 · Accepted solution]

You will need to report your Polish income as gross income. You can take a foreign tax credit for the foreign income taxes you paid on your income, but not for your social contributions. These social contributions, called FICA taxes in the US, cannot be claimed as a foreign tax credit in the US because they aren't income taxes.  Instead, they are used to provide for retirement, disability, and healthcare benefits at a later point in your life.

Yes, you may deduct health insurance on your US return.  Health insurance is reported as a medical deduction and is a itemized deduction. You can take advantage of the  the medical insurance deduction if you are able to claim itemized deductions for the year.

Itemized deductions are deductions that include medical expenses, gifts from charities,  mortgage interest, real estate taxes, and state income taxes you paid during the year.  If these itemized deductions exceed $29,200, you may itemize. If you are unable to itemize, then your deduction is the Standard Deduction amount of $29,200.

To report your medical expenses.

1. Log into your Turbo Tax return
2. Go to deductions and credits
3. Medical
4. Medical expenses

To claim a Foreign Tax Credit for Taxes paid.

1. Log into your Turbo Tax return.
2. Go to Deductions and credits.  If you are in the software, go to federal first.
3. Estimate and other taxes paid 
4. Foreign Tax Credit>start or revisit