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taxing times
Returning Member

Living abroad. How do I get credit for foreign tax on *self-employment* income?

We use "credit" for foreign taxes paid (Canada), form 1116.  This works for my foreign employed income,
but not my wife's self-employment income from schedule C.  Credit on Schedule 3, line 8 is limited to employed income. Schedule 3, part II is empty (including line 15).   I don't know what I need to change in Turbotax to get the credit. Thank you.
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5 Replies
pk
Level 14
Level 14

Living abroad. How do I get credit for foreign tax on *self-employment* income?

@taxing times , yes indeed ( name that is ).

1. Both a salary ( employment  ) and self-employment ( sole proprietor / schedule--C ) income  are eligible for  foreign earned income exclusion.

2. For self-employment income fill out schedule-C;  note down the net income  that shows up as business income

3.  For salary , you do not fill out the W-2 area but under  -- "personal income "--> "I will choose what I work on ..." ---> from the list of income categories, way at the bottom under  " Other uncommon  incomes", select "Foreign Earned Income and Exclusion"  --- here  for total foreign income  recognize the total of your foreign salary  and Self-employment  net income  ( above).  From here on follow the instructions for filling out  form 2555 and follow through.  

4. Then under deductions and credits , tell TurboTax you have foreign taxes paid to report and follow through --- note that ONLY   foreign taxes on  foreign income not excluded is  reported as  foreign income on form 1116 as also the taxes paid on that  foreign income..

 

Does this make sense ?  If you need more specific help, please consider sharing more of the actual situation here  ( No personally identifiable info please ) or use PM with more details.  I will circle bcak once I hear from you .

 

k

 

taxing times
Returning Member

Living abroad. How do I get credit for foreign tax on *self-employment* income?

Thank you for your reply.


> under " Other uncommon incomes", select "Foreign Earned Income and Exclusion"

I did this and entered self-employment income and employed income. I am excluding "neither of us" because I want to use the "credit" method (I do not use form 2555 at all). After I am done, the income overview shows under foreign earned income my employed income, and under self-employment, my wife's profit.

I then enter foreign taxes paid under deductions, once under the general category, and once for the passive income category.  From the calculations I can tell that I got foreign tax credit for the employed income, but not for the self-employment income.

Any thoughts?

pk
Level 14
Level 14

Living abroad. How do I get credit for foreign tax on *self-employment* income?

@taxing times ,  thank you for your reply ---- the problem as I see it is  (a) there is no need for two  different  1116s ; Self-employment earning and employment earnings are both active income and come under the general category.  Put all on the same 1116 .;  (b) make sure that you have included the income taxes  ( wages  and self-employment/business income ) totaled on 1116;  (c) also the schedule C for your wife should produce a self-employment  tax Schedule-SE  ( at 15.3% of  most of the net income )  --- you need to make sure that this is applicable in your country of residence --- many have Totalization agreement with the USA and only country of residence or your home  country charges  FICA/SECA or equivalent.

 

Does this now make sense ? Do you need more help ?

 

pk

taxing times
Returning Member

Living abroad. How do I get credit for foreign tax on *self-employment* income?

Thank you for your help.

(a) I only have one form 1116 for general income; the other form 1166 is for a  passive income.

(c) Yes, I have a schedule -SE.  My country of residence is Canada.

 

In form 1116 (general income) , line 14,  my total foreign tax credit looks correct.

In form 1116 (general income) , line 20, the tax credit is reduced and only corresponds to my taxes owed (before self employed tax)  from Form 1040, line 16.

In form 1040, line 23,  there is self-employment tax (from schedule 2, line 21). This is the tax I cannot get rid of.

May be the problem is not form 1116 but schedule 2?

 

 

 

 

 

 

taxing times
Returning Member

Living abroad. How do I get credit for foreign tax on *self-employment* income?

I believe I have the solution, but I am not sure. comments welcome.

 

The tax on self-employment is also called social security tax.  You can remove this tax if you live in a country with a totalization agreement  (dual tax treaty).  To enter this in Turbotax :

 Goto :      Other Tax Situations, Business Taxes and Deductions, Self-employment tax.

Press "Make adjustments".

Enter profit from business as a negative number, this will zero out the social security tax.

 

You are allowed to do so IF you have  prior agreement from the IRS .

 

"To establish that your self-employment income is subject only to foreign social security taxes and is exempt from U.S. self-employment tax, request a certificate of coverage from the appropriate agency of the foreign country. If the foreign country will not issue the certificate, you should request a statement that your income is not covered by the U.S. social security system from the U.S. Social Security Administration. Attach a photocopy of either statement to your Form 1040 each year you are exempt from U.S. self-employment tax. Also print "Exempt, see attached statement" on the line for self-employment tax."

https://www.irs.gov/individuals/international-taxpayers/self-employment-tax-for-businesses-abroad

 

There is a related entry  in the turbotax community you can search for : "The USA and Chile have a double taxation treaty for both income tax and social security tax. How do I zero out self employment tax in turbotax."

with an answer by   @JeffreyR77 . Thank you!!!

 

 

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