USCitizen, Part year in Germany as a Phd Student, how to claim FEIE on 1040

[ComplicatedTaxSituation]

Our situation:

My husband and I are US citizen. We have a question for FY2024 Tax filing using Desktop version of TurboTax Home and Business. We are filling married jointly in the state of California. We claim standard deductions.

• Wife stayed in US entire year, earned income of  (K1 + W2) $25,000
• Husband stayed in US from Jan till Aug 2024, earned income of $70,000
• Husband moved to Germany for PhD starting Sept 2024, earned income from University $11,000
• Husband paid Income tax in Germany for 4 months about $1200
• Husband paid health insurance in Germany for 4 months about $1400

Other information to get better response for TurboTax usage:

1. Together we received ObamaCare premium assistance in California of about $12000 for both of us in 2024
2. Husband established residency in Germany in September 2024 and the entire PhD program will take about 3-4 years.

When we try to enter his income earned in Germany, paid by his University, in Desktop version of TurboTax, it doesn't allow us to claim FEIE (Foreign earned income exclusion) because he hasn't stayed in Germany for 12 months so far even though he intends to stay there for 3+ years. He has established residency, i.e. register as a resident of the city in the local city hall, paying taxes, has valid visa as a student, has rental agreement, has health insurance etc. However in TurboTax we cannot claim his status to be bonafide foreign resident even though he intends to stay there for 3+ years. The physical test doesn't work out either since it has been only 7+ months since he has been living in Germany. He will be filing the German tax paper work in July (they  have a longer deadline for annual tax returns than in US)

My questions:

1. How do we claim his entire German income as FEIE in turbotax? When we try to enter the start date of his residency in Germany as 08/30/2024, it doesn't recognize his income as FEIE because it doesn't meet the physical test or bonafide test as per TurboTax. Hence Turbo tax includes this income towards US taxable income and doesn't allow for any exclusion. What do we need to do to claim his income in Germany as excluded from US taxes?

2. This inclusion of his income from Germany  on 1040 also reduces our CA Obamacare assistance and we have to return some $1500 back. How do we exclude this income from his University from the MAGI calculation and how do we add the health insurance premium of $1400 he is paying from his salary in Germany to the TurboTax  to count towards our out of pocket health insurance premium cost so that we can claim it as our of pocket health premium cost.

3. Can we claim any deduction such as airfare, initial hotel stay, temporary accommodation, taxi, train fare when he moved to Germany to pursue his PhD?

4. How do we avoid double taxation on his German income?

Thank you for reading the entire situation and my questions. Any pointers would be highly appreciated.

If I find a solution to this situation from other sources and also from experts on this board, I will post my findings and how I solved this situation so that others can benefit from it.

[pk · Accepted solution]

@ComplicatedTaxSituation , thank you for posting here.

While I go through , in more detail, your long post, what I understand from a first blush :

(a) you are both US person (  citizen ), resident of California.

(b) You ( wife) have US sourced income for all of 2024; Husband has  part-year US sourced income

(c) Additionally Husband  established Foreign Tax home  ( exact date needed here -- it is usually the first full day post arriving in the foreign land

(d) Husband has Foreign Earned Income ( this is not stipend right -- he has to actually work  / research, teach or whatever ).

 Now the questions --    How to exclude  FEI from US taxes ?  And thereby reduce  follow-on  impacts on  health insurance etc.

Is there anything I am missing ?

 Very generally , in such situation it is best to  request  extension and file ONLY after meeting the  Physical Presence  Test window  ( continuous 12 months, bridging the foreign earning period)

Will you please confirm my understanding -- and I will be back .

pk

[ComplicatedTaxSituation]

Hello @pk 

Thank you so much for responding to my post. Here are the details that you requested confirmation and additional input:

(a) you are both US person (  citizen ), resident of California. 

Answer: That is correct. Both US Citizens residing in CA and still maintaining residence in CA and voter registration for both.

(b) You ( wife) have US sourced income for all of 2024; Husband has  part-year US sourced income. 

Answer: That is correct. 

(c) Additionally Husband  established Foreign Tax home  ( exact date needed here -- it is usually the first full day post arriving in the foreign land

Answer: Landed in Germany on 30th August. First full day of engagement for PhD program is 2nd September 2024 (Monday) since 1st Sept was a Sunday.

(d) Husband has Foreign Earned Income ( this is not stipend right -- he has to actually work  / research, teach or whatever ).

Answer: Yes, he has to conduct research (majority of time) leading to publishing papers and conference presentations, attend classes as a student about once a week.

 Now the questions --    How to exclude  FEI from US taxes ?  And thereby reduce  follow-on  impacts on  health insurance etc.

Answer: That is correct. He has already paid income taxes in Germany for the earned income in 2024. Additionally, for the statutory health insurance, the premium is deducted from his paycheck every month in Germany.

Is there anything I am missing ?

Answer: He may visit US for 3-5 weeks in total for family visit as well as for various conferences between now and end of 2025. However if we need to limit it to 35 days (365 - 330 days outside of US), he has an option to skip the family visits and conferences.

 Very generally , in such situation it is best to  request  extension and file ONLY after meeting the  Physical Presence  Test window  ( continuous 12 months, bridging the foreign earning period)

Answer: Yes, we have explored that option as well and massaged the dates in the Turbotax to reflect as if he left for Germany in 2023 Sept and had been there for 12 months till 2024 Sept. However, that doesn't reduce the MAGI for Covered CA premium assistance calculation and doesn't take into account the health insurance premium already paid in Germany. 

Will you please confirm my understanding -- and I will be back .

[pk]

@ComplicatedTaxSituation , yes I understand  that you are having a somewhat complicated situation cause by both needing to exclude  your foreign earned income from federal taxes  but also  being qualified for the  health insurance.

What  you appear not to have considered  is that once you  ( Husband ) have left California , you are NOT a tax resident of California.  Thus it is perhaps better for you to file MFJ for federal and  MFS for California  ( California  allows  residents  to be considered  non-resident for up to  three years I think ).  I suggest this because  ACA and /or  health insurance requirement is not applicable when you are outside the country.  So   the applicable MAGI should only be  her income and health coverage is only for her.

This is what I find from FTB California:

"

Exception

If you file a joint return for federal purposes, you may file separately for California if either spouse was one of the following:

• An active member of the United States armed forces or any auxiliary military branch during the year
• A nonresident for the entire year and had no income from California sources during the year

Filing requirement

Visit Resident, Part-year resident and Nonresident taxation or Military for your filing requirement.

Perhaps your wife may call the FTB and get better guidance -- I think this may not be applicable for 2024 but should apply for 2025 on wards.

And yes ,  to be able to  take advantage of  FEIE, you will have to meet the  330 Days abroad  ( note flying over international waters  does  not count as part of the 330 days.  So have to be careful.

Is there more I can do for you ?