Should I use form 2555

Forum|Forum|2 years ago
January 27, 2024
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I would like to switch from an s corporation to individual tax filing (married filing joint) to maximize FEIE and deductions without the additional expenses of SS and MC

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jtax

Level 10

Not sure I understand the question. Either you were an owner/employee of an s-corp in 2023 or you weren't. You can't change after the fact. You certainly could shutdown your s-corp in 2024 and act as a sole proprietor after that date.

Also I wonder if you have the s-corp vs. sole proprietor SS/MC benefits backwards. An s-corp owner does not pay SS/MC on the s-corp's profits. Only on wages. But you MUST pay "reasonable" wages, which means whatever the market rate for someone performing your job would get. And you must pay SS/MC on those reasonable wages. A sole proprietor pays SS/MC on a net self-employment income. (I.e. business gross income minus business expenses).

Please clarify if I am misunderstanding.

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robertone139Author

Level 2

You are correct, I started an S corp in 2023 for my wife and me to keep contributing to SS/MC and do not lose that money. However using the ss.gov retirement calculator we realized that is costing us almost 20,000 dollars per year in SS taxes plus other expenses not to lose 200$/ month for each of us by the time we reach 67.

I have a CPA who's taking care of the corporate taxes and payroll, however those are other expenses bringing the total to over 23K.

I could dissolve the corporation and just file married joint next year as my tax liability would be way less than what is costing now.

moving on, I would need guidance in how to apply the 126,500$ FEIE, the 29,200$ standard deduction and the 16,000$ (combined) IRA contributions for tax year 2024.

Hope this is not too confusing.

jtax

Level 10

Thanks, great support, and you got most of it right.

1) No other income

2) MFJ, bracket is actually 94,300-201,050

3) Unfortunately no FTC as there are no income taxes paid in this here country, no tax treaty either and no ss bilateral agreements, however the company does pay into a local ss locally known as National Insurance.

Where I get my doubts is here and I am citing the IRS on this:

https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion#:~:text=Figuring%20the%20tax,1040%20Instructions.

and particularly this paragraph:

Figuring the tax: If you qualify for and claim the foreign earned income exclusion, the foreign housing exclusion, or both, must figure the tax on your remaining non-excluded income using the tax rates that would have applied had you not claimed the exclusion(s). Use the Foreign Earned Income Tax Worksheet in the Form 1040 Instructions.

That is where I figured the 22% tax bracket.

Then I ran a mock 2555/1040/schedule1 return and I must have made a mistake because it came out with tax due 0, nada, zilch while I know I had a residue of about 30k taxable income after standard deduction and 16k into a qualified traditional IRA.

@robertone139 Question: you said you made the S-corp for you and your wife. Do you and your spouse run/work the business together?

If your wife works in your business and you ditch the s-corp to operate as sole proprietors, then you should be able to each get the max FEIE. This will only help you if your wife actually works in/runs the business. If she doesn't work or works elsewhere that won't help. [For this year with the s-corp not only your W-2 wages but her W2 wages also are separately eligible for the FEIE.]

Note you don't each have a separate sole-proprietorship. Normally you would have a partnership but a married couple filing jointly can elect to to each file schedule c's for their share of the joint venture. See

https://www.irs.gov/faqs/small-business-self-employed-other-business/entities/entities

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