Hi. I am wondering if under the "Foreign income and exclusion section" (to report foreign income) one should enter the gross foreign income, or the net income, or the gross minus the standard deduction that is also applied in the U.S.?
Issue: Let's assume that my gross income in Canada was 40K. However, I don't actually get the 40K. There are many expenses, taxes (federal income tax, provincial income tax, health tax, unemployment, social security, etc, etc.) which at the end of the day may actually leave in my hand roughly 30K. It would seem somewhat absurd that the U.S. would want to tax me on money that is not actually real net income. Suppose you live in a country where the taxation rate is 50% and you earned 30K. It would seem illogical that you would get taxed on 30K when you only have in your hand 15K.
Doing some research on the IRS site, it says that one can claim the foreign credit AND the standard deduction; but does this mean that I can apply/subtract the standard deduction to my foreign gross income and then just report the "net" income. For a married couple filing jointly in 2023 the standard deduction is 27,700. So do I need to actually subtract 27,700 from 40K and then report the 13,300 net income only?
This is straight from the IRS website (see point 2):
It is generally better to take a credit for qualified foreign taxes than to deduct them as an itemized deduction. This is because:
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@tagteam , @astral101 , I think I have answered this question earlier. This is a case where the taxpayer's tax home is USA and earns "wages" from Canadian entity as a remote worker. This puts the taxpayer in messy situation because the "tax-home" being US, and therefore taxpayer is not eligible for FEIE. Taxpayer must report the gross income on Schedule-C and the net income ( this is the income that is being taxed by both Canada and USA ) is then eligible for foreign tax credit/ deduction.
Additionally tax payer is subject to SECA taxes, absent a SSA approved "certificate of participation" from Canadian employer/SSA Equivalent.
Or is this a different issue and I am missing the point ?
pk
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