Form 1116 and Form 2555 round and round in circles

[pk]

@Edgeman  Whereas I agree with your frustration about not being able to enter foreign wages directly  as in entering a W-2, but there is some reasoning for the way  foreign wages  are entered.

(a) you have to allow for wage earners  whom  earn US wages for part of the year and earn foreign wages for the rest of the year -- i.e. you have both a W-2  ( with federal, State and FICA  collected ) and  a foreign wage statement   showing  foreign wages , foreign taxes and foreign  Social Security / Medicare equivalent. A os have to allow for  differences  in the rates of all of these  types of taxes and/or additional categories of taxes/ contributions.

(b) You also have to allow for the wage earner whom moves from one foreign location to another and also the variations  of taxes therewith.

)c) Then there is the case of self-employed individuals earning in one or more foreign locations.

Therefore IRS has taken the position to decouple  the US wages  report ( W-2) and the foreign wages / earnings statement ( generally reported  on schedule-C ) and merge the foreign  "active" earnings under one heading.  The nearest equivalent  reporting characteristics  happens to Schedule-C because there is  withholding of taxes ( US) and no SECA (  i.e.  Social Security and Medicare contribution with no employer participation).  It also allows for Schedule-SE for SECA or immunity from this through  totalization agreement.  Additionally it allows for earned  foreign income exclusion ( directly/ automatically through use of form 2555 ) or foreign tax credit ( where you need to  enter the foreign income -- unexcluded portion/total depending on your choice).

TurboTax is only implementing the IRS process.

Does this answer your question?    If you are satisfied please "accept" or tell me I c an earn that satisfaction.

pk

[Sammy25]

Hello,

I have an issue going on which is driving me crazy! I'm a US citizen with Canadian income. Using turbo tax online, Form 1116 shows my foreign income and taxes, however, form 1040  1h (other earned income) shows as $0. Shouldn't it account for all worldwide income? I tried to edit different sections under income and wages but nothing flows the foreign income (in USD) to form 1040. I don't want to end up with a refund and then having to pay back the IRS for tax, P&I. Please help!!!!

[pk]

@Sammy25 , don't know what to answer --  what is this other income?   What is the income that you have from  Canada.  Need more details on the types  and/or amounts of incomer from Canada ?  Where did you enter these incomes .     Are you living in Canada  or in the USA ?

Please answer my questions and I would  circle back and help -- yes ?

pk

[Sammy25]

hi PK,

I've relocated from USA to Canada in Sept 2023 and it's my Canadian salary (general income category) from Sept through Dec 2023 on a Canadian T-4. The income and tax paid shows up on form 1116 & reduces my US tax due by the tax amount paid in Canada (I claimed the Foreign Tax Credit, not deduction). However, it is showing $0 on form 1040 line 1h. Shouldn't the canadian income (in USD) be part of my total income on the income section of Form 1040?

[pk]

@Sammy25 , yes your Canadian salary should be part of your AGI  ( if you are  not excluding the income but choosing Foreign Tax credit ).

(a) your Canadian wages  should have been entered as schedule-C ( sole proprietor / self-employment  income).  If it salary then there are no expenses to deduct against this gross income;

(b) Schedule-C income would trigger  Schedule-SE -- self-employment  at 15.3% of most of the  Schedule - C income) .   You can also reduce this bite by   attaching a   "Certificate  of participation " from the Canadian equivalent of  US  Social Security --- because  Canada   has  a totalization agreement with  US.

(c)  All the above is in addition  to what you show as Foreign Source Income on form 1116.   Note though that  while the foreign taxes paid is recognized dollar for dollar, actual amount  allowable for the current year would be limited to lower  of US tax on the income and  a  ratio of  your foreign source income to world income.

Does this solve your problem ?

pk

[Sammy25]

I'm sorry I'm struggling to wrap my head around this. I think I need to plug my foreign income (salary from a job) on line 1h on form 1040 (other earned income). Please let me know if that is not correct.

As suggested, entering it as self-employed income on schedule K is triggering such a big tax for some reason that it resulted in a 30% extra tax calculation, a 5 figure tax refund turned into a tax due position. So this resolution doesn't seem right at all. This software is supposed to make our lives easier, it's turned into a full time job right now. Please help.

Also, where do I get the Certificate of Participation from?

[Sammy25]

Also, wouldn't adding my Canadian salary/wages income (from a T4) as self employment income calculate self employment tax, half of SS & Medicare?

[RobertB4444]

Yes, and @pk told you that you can remove the social security and medicare by mailing in the return with a 'certificate of participation' from Canada in order to show that you already paid in the equivalent of the social security into the program there.

If you're going to enter it on 1040 as 'Other Income' that is the equivalent of the same end result.  As long as the IRS approves it it won't make any difference.  Enter it there and get your foreign tax credit and go forward.  That will probably result in a letter from the IRS asking for more information before they issue the refund but at least the return will be electronically on time.

@Sammy25 

[Todd123]

Yes, me too. It doubles my income. I didn’t realize till just this year. I paid withholding out of the country and on a W-2 as well. I saw your comment and same thing. I worked for a US company that had no office in the country I was working. Paid withholding on a US W-2 and paid withholding in the foreign country. How we can get an answer.

[pk]

@Todd123 , please tell me more on your specific situation either on this thread or PM.

(a) I do not understand  how  you had withholding in the foreign country ( which country please? ) while getting a W-2 in the USA.  Because without having local presence , how did the  US company manage  that.  

(b) When did you enter that foreign country ( exact date ) and when did you leave ( if you are no longer on that foreign assignment )?

(c) Did you employer provide housing or what ?

(d) Did you family live there with you  or did they stay back in the USA ( with or without  US income ) ?

(e) Is  this your first year in the foreign country  ?   I know your post suggests  that you have been paying both countries for some time -- I need the specifics, please  ?

I will circ le back once I hear from you 

Are there other things I can help you with ?

[Todd123]

Trinidad and Tobago

in TT from 2/1/2020 to 7/3/2023

i spent in excess of 330 days in TT which qualifies me under presence rule

The Company I work for did not have an office in TT. The client paid the withholding on my behalf as part of their contract.

Client paid for housing and a per diem.

Im not sure about filing 1116 or 2555 or will I need to file a return in Trinidad to recover the withholding paid 

It was just me with no family. 

The taxes were paid retroactively in TT based on the amount of time I spent in country. I think the actual date they were paid was around 12/22

[pk]

@Todd123 , 

On reading through your response  ( thank you ) to my questions,  a quick look at the pertinent articles of US - Trinidad-Tobago  Tax treaty, 

(a) the fact that your  TT client paid   for housing ,  per diem and  withholding tax ( tax at source ) , raises more questions --- 1. did they give you  a statement of earnings and  taxes  withheld ;  2.  Do these  benefits  ( housing . per diem, taxes etc. ) show as earning  on the statement of income ;   Does your W-2 from the US employer include these amounts  ?

(b) have you filed US returns  for the  respective years  ( 2020, 2021, 2022 and 2023 ) ?  How about any filings in TT  ( Trinidad and Tobago ).

My suspicion is that  your client in TT had done a tot-up and paid all your taxes  and your US employer   has issued W-2s based  on your actual salaries  ( without considering  the TT benefits ).  If that is the case  then you were not doubly taxed and hence neither 1116 and/or 2555 apply.  

Please tell me more about the income statements  from your US employer and that of TT.   

I hope I am wrong in my assumptions.

pk

[Todd123]

TT client did not give me a statement of earnings.

They provided a receipt of taxes paid on my behalf to TT government. I did have a BIR number assigned in Trinidad.

None of these benefits show up on my US W-2. The totals of these items did not exceed the GSA per diem for Trinidad. Per diem is non taxable .

Taxes were filed for 2020-21-22-filing 23 currently in US. As withholding was paid retroactively amended returns will need to be filed.

No returns have been filed by me. I’m questioning now if the TT client filed returns on my behalf and I just didn’t know. I see no reason I would need the TT BIR number unless that’s what happened.

[pk]

@Todd123 , please give me a little bit more time because I am troubled  by the facts as I understand  them.  I am chasing some letter rulings from the IRS.  Will be back probably later today.   Please excuse .

pk

[pk]

@Todd123 ,  I originally thought that because your  per diem was generally  not taxed , that there is no need for you to even file/ recognize  your income in TT.  However , on seeing that your actual  assignment to TT by your US employer spanned a much longer period, I looked into IRS position per section 162 and letter  ruling number  2019-0003  ( see  https://www.irs.gov/pub/irs-wd/19-0003.pdf ) -->

"For reimbursements to be deductible, a taxpayer may only be “away from home” on a
temporary, as opposed to an indefinite or permanent, work assignment. See Peurifoy v.
Commissioner, 358 U.S. 59 (1958), 1958-2 C.B. 916. Section 162(a) provides that a
taxpayer is not considered temporarily away from home during any period of
employment that exceeds one year. "

 Thus  you need to consider  your per-diem paid in TT as  wages / active income  -- subject to federal taxes and  FICA.  This is of course assuming that  your stay in TT was continuous and not broken into multiple  assignments of less than one year limit.  This also means that either your come under SECA (  15.3% of net  Schedule-C income i.e.  all your  accumulated per diem , if that is all the  income you received while in TT ) or FICA ( where your employer and you share  the SECA on a 50-50 basis ).

Therefore , if you need help herein , please consider  providing me with more details of your stay in TT , OR consider  seeking the services of a  Tax Professional  ( familiar with international tax regime ).

I think what took place here is that  per the contract with the  client in TT, your employer  paid  your normal wages  as an employee  and the client paid your  per-diem and tax thereon in TT.  Note that for US purposes,  ( and if indeed you are considered  on  an indefinite assignment   per  section 162 )  your world income would include  US sourced income  PLUS all income/per diem in TT plus any taxes paid on your behalf by  the client.  So essentially you have to do a gross up.  However, you should be able to exclude  the foreign income ( up to a maximum for the  tax year ) using form 2555 and foreign tax credit for all unexcluded  income.  The SECA/ FICA   tax though on the  world income is not  excludable.

Does this make sense ?

 If this is so , now we can get back to your original question of  TurboTax and  forms 2555 + 1116.  So please , given the above , can you tell me  about what you are trying to do and where  you are having issues .

I will indeed circle  back once I hear from you -- yes ?

pk