Regarding foreign earned income on Form 1040 and gross income & foreign tax paid on Form 1116

[Kevin0000]

Hi,

I'm US citizen and worked in US during 2022.

My wife is Canadian and worked in Canada during 2022. She is neither PR nor citizen of US.

We would like to use the married filing jointly status and treat my wife as resident. 

After use TurboTax to compare form 2555 and form 1116, we found form 1116 was more beneficial.

Let's say, my wife has below categories of income in Canada.

Employment Income, the amount is $A, tax deducted on it is $B.

Employment Insurance Benefits (Maternity leave), the amount is $C,  tax deducted on it is $D.

RRSP Contribution, the amount is $E.

FYI, RRSP is the Canadian equivalent of the pretax 401k in the US. 

1. On the generated 1040 form, we found that the foreign earned income was placed in line1h, is this expected? What should be this value? (A) or (A + C - E) or (A - E)?

2. Regarding the gross income on Form 1116, it should be (A + C), correct?

3. My wife will get some refund (Let's say, the amount is $F) based on her tax return with CRA (Canada Revenue Agency). How do we report this refund in form 1116? Use (B + D - F) in Part II directly or use F in some other lines?

[Kevin0000]

Hey @tagteam @DaveF1006 , could you please take a look at this post and give some suggestions? Thank you in advance. 

[DaveF1006 · Accepted solution]

 Let's answer your questions one at a time.

1. Line 1h is the correct line to report your foreign income on your 1040. I am not sure what those other values you mentioned are pertaining to.  
2. If you are referring to the columns A + C in the gross income column, then there is no A + C because we only talking about Canada and no other countries. There should only be an amount in Column A only. let me know if you are referring to something else.
3. if your wife receives a refund and you know the amount of the refund, you would only report the net foreign tax paid and not the entire amount.

Here is some additional information on how to report your income if you are married filing jointly. 

 Treat your spouse as a resident alien for tax purposes.   If you do this, you will need to include your spouse's worldwide income in your US tax return and it will be subject to US taxes.  

To do this follow these steps.

   1. Attach a statement to your tax return, signed by both spouses, that states that one spouse is a nonresident alien and the other is a U.S. citizen or resident alien, and you are choosing to both be treated as US residents for the tax year.

   2. List the name, address and Social Security number (or Individual Taxpayer Identification number) of each spouse.  If you don't have a SSN, You will need to complete a Form W-7, Application for IRS Individual Taxpayer Identification Number (ITIN) (http://www.irs.gov/pub/irs-pdf/fw7.pdf).  This form will be attached to your tax return.  Turbo Tax does not support the Form W-7.  You can complete it outside of Turbo Tax.  You will have to print, sign and mail your return in if you are using Form W-7.

   3. For the first year you make the choice, you have to file a joint return. In later years you can file joint or separate returns. Married Filing Jointly will give you a higher standard deduction and has other benefits that are not available using a married filing separately status, but you do have to include your spouse’s worldwide income in joint income.

Reach out if you have additional questions.

[Kevin0000]

Hey @DaveF1006 Sorry for the confusion. 

A, B, C, D, E, F means 

My wife's employment income, whose amount is $A, tax deducted on it is $B.

My wife's Employment Insurance Benefits (Maternity leave), whose amount is $C,  tax deducted on it is $D.

My wife's RRSP Contribution, whose amount is $E.

The refund my wife will receive from Canada Revenue Agency, whose amount is $F.

[DaveF1006]

Yes, in completing your answer, your wife's employment income plus her maternity leave benefits are taxable income so all income amounts should include both of these totals. 

As far as your wife's RRSP contribution, it is limited. Here is a Turbo Tax article that explains the limitation and how to determine how to report it. It does require a form 8833 to declare it as explained in the article.

Once you have determined the RRSP amount, then you could apply the formula A + C - E) to determine your foreign income amount that is reported in Line 1h on the 1040.  A + C is the Gross income to be reported since maternity leave benefits are taxable income. 

Also you will add the foreign taxes from B and D and subtract the refund F to report the amount of foreign taxes that you actually paid out of your pocket that weren't reimbursed.

@Kevin0000 

[pk]

@Kevin0000 , having read through the posts above and agreeing with @DaveF1006 , just wanted to add a few little  items here  ( mostly for awareness );

(a) when making an election to treat a Non-Resident Alien Spouse as a Resident of USA, under 26 CFR 1.6013, this remains valid  till one/ both spouse cancels;

(b) it is valid for the entire year i.e. starting date of residency is 01/01/XX

(c) the "Non-Resident" spouse cannot assert any treaty benefits of the "other country" -- in your case of Canada-US treaty. This in  particular applies to ( if the "non-Resident spouse" is  resident of country X) passive incomes  such as interest / dividend  etc which are generally limited by treaty  to be taxable ONLY by the  resident  country -- US must be allowed to tax these incomes  just as it does for all  US person ( citizen/Green Card / Resident for Tax Purposes );

(d) Because  the "Non-Resident Spouse" earnings are foreign sourced , when Physical Presence  Test is satisfied, foreign Earned Income exclusion may apply .

(e) SECA ( Self-employment taxes) may be levied-- however if you want to take advantage of the totalization agreement ( i.e. pay social security and medicare  to one country  but not both ) you may have to get a certificate of participation /  coverage from one of the countries to show to the other.

Did I leave something out ?

pk

[Kevin0000]

@DaveF1006 Regarding form 8833,

Since my wife will be treated as resident after we choose the status of married filing jointly, then we should check 

The taxpayer is a dual-resident taxpayer and is disclosing a treaty-based return position as required by Regulations section 301.7701(b)-7

and

Check this box if the taxpayer is a U.S. citizen or resident or is incorporated in the United States

correct?

The line 3 asks for 

Name, identifying number (if available to the taxpayer), and address in the United States of the payor of the income (if fixed or determinable annual or periodical). See instructions.

But my wife worked in Canada during 2022, there was no US sourced income for her. How do we fill the information for this line?

@pk Thanks for your additional items.

[pk · Accepted solution]

@Kevin0000 , don't want to muddy the waters  but  I am just wondering what is it we are trying to do here?

(a) if the idea is to  file jointly for the standard deduction benefit, then in my view ( after going through the all that I could find on RRSP and generally with earlier replies and mentioned articles ), if you are able to exclude all your wife's foreign earnings ( i.e. all her Canadian income , wages, maternity benefits etc. ) from US taxes , then just declaring the whole income  and without trying to exclude the RRSP contributions -- then achieve your goal.

(b) as I  understand it RRSP is generally equivalent to  ( and mostly as such ) as a  401K with a basis  because  you have not excluded  the income from US taxes i.e. it is an after tax contribution by virtue of including it in the US tax declaration , even though it is excluded  under foreign earned income exclusion.  IRS may argue that  that this is true literally but it violates the intent of the law  which is to ameliorate / extinguish  the effects of double taxation.  The fact  that US Treasury under Rev Proc. 2014-44 has deemed  automatic  deferred taxation on the earnings of the RRSP  till distribution, strengthens the case that  this is being considered a defacto 401(k) equivalent for all purposes   ( perhaps the yearly 401(k) tax free limit also applies  ).  If Canada taxes this the RRSP contribution then it becomes  "after-tax" contribution and so including the whole income  i( i.e. wages/self-employment, maternity benefits including the RRSP contributions and then excluding the whole amount per Foreign earned income exclusion, obviates the need for any further  reporting --on income -- no 8833 required.

RRSP distribution then follows the usual taxable and non-taxable allocation and taxation -- note under article 18 of the treaty , Canada may tax this as well.   But that for a much later day and who knows  what the rules may be at that time.

(c) also note that because these monies are sitting in a foreign account the FBAR and FATCA regulations come into play -- must be reported each year.

That is my take on this --- apologies if I ruffled any feathers  ( but this has been bugging me for sometime)

Please excuse

pk

[rusyazik]

You wrote:

> Line 1h is the correct line to report your foreign income on your 1040. I am not sure what those other values you mentioned are pertaining to.  

Having just read the IRS instructions, I don't think is true. In my case, I have self-employment income earned outside the US which appears on Schedule 1 (Business income or loss) which does appear on line 8, Other income. So TurboTax counts the income twice, on 1h and on line 8. Schedule 1 is right, Schedule C is good, Schedule SE is good, and, Form 2555 is good. The only problem is double counting on the 1040 on line 1h and line 8. That certainly is not right and looks like a bug.

I have tried every way under the sun to jig the system and I am losing my mind.

[pk]

@rusyazik , please can you give me a little bit more info ---- which country, approximate amt. of  Self-employed Gross income, Gross expenses  -- ( I will recreate the Schedule-C . and Schedule-SE ) --- any US sourced income;  where and how did you tell TurboTax about the foreign nature of the Schedule-C ( for 2555 ); do you also need  form 1116.    What you are saying sounds like double entry --- and I am sorry to say that it is very easy to do that  -- the TurboTax on-screen instructions leave  a lot  to be desired.   Should I assume that you are using a CD/Downloaded Windows version -- I do not have experience with On-line version.

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

pk

[rusyazik]

Hi @pk Thanks for your interest in someone losing their mind 😀

I am not using the CD version, I am using the online version so perhaps you can't help.

I am resident in Mali, I earned some money self-employed, gross $26,827 expenses $7445, qualify for the Foreign Earned Income Exclusion. Get TurboTax to do the 2555 is a feat, I found online that you have a type a certain phrase in the search bar and click on the link that comes up ... but it worked and Sch 1, C,  SE, and 2555 are perfect. I didn't pay foreign taxes so I don't have a Form 2116.

It seems self-evident that foreign self-employment income must go on line 8, not 1h, because Sch 1 deducts the foreign earned income credit. I should have no income tax liability with the FEIE but TurboTax wants to pay taxes on $26,827 on line 1h and also adds income from Sch 1 with FEIE taken into account.

[rusyazik]

Thank you @pk ... your comment about double entry was enough of a hint to lead me to find the hitch. I had put my gross in the Form 2555 Interview when it asks for "income or payments". I should have put nothing ... since it is already entered in Sch SE. I guess "income or payments" is meant only for payments as an employee of a foreign company. The wording could be better ... much better ... but I suppose I am in rare area of TurboTax. Expats are strongly advised to avoid it, there is a TurboTax knock-off for Expats which handles this stuff much better ... but it is convenient since I have many years of returns in TurboTax.

Thanks again.

[pk]

@rusyazik , while I do apologize for my delay in answering your query, I am happy  that you found the answer to the issue  and have , thereby able to complete the return.

Is there more I can do for you ?

pk

[Sammy25]

hi Dave! 

You're my last hope! We're married filing jointly for 2023, both US citizens relocated to Canada in Sept 2023. Used the online turbo tax software and there is an issue with the foreign income (Canadian salary on a T-4 working for a public company) flowing to form 1040. It picked up my foreign income on form 1116 but I believe it should flow to form 1040 line 1h as mentioned by you above. Another tax expert on this forum suggested entering it as self-employment income, I don't believe that is correct because the 1040 it generates still shows line 1h as $0 and I believe SE income can calculate 1/2 of SS ad Medicare too (and it is not income from self-employment at all). I'm about to file for an extension and am extremely disappointed that such a sophisticated software is not picking up foreign income anywhere on the 1040. If you could please suggest how to get my foreign income on the 1040 the correct way, I would really appreciate your help.

[DaveF1006]

To clarify, was you T4 income earned while living in the US or was it earned after you moved back to Canada?