Seeking Advice: Excluding Foreign Income from US Taxation for Joint Filers

[ihatetaxes123123]

My wife is a UK citizen and resided and worked there throughout 2023 while waiting for her spousal visa. She meets the IRS rules to have her income exempted.

I am an American citizen residing and working in California. As an employee of an American company, I am liable for federal and state taxes.

We plan to file our 2023 taxes jointly once again, as we did for the first time last year.

This year, our federal tax liability changes from a refund to owing money, while our California state taxes decrease significantly when we enter her income (which is less than $120k) under the "Foreign Earned Income and Exclusion" section.

Last year, when we filed jointly and excluded her income, we received a larger refund, and we expect a similar outcome this year.

Could someone please advise us on the steps we need to take to ensure that her UK income is excluded from US taxation?

Thank you.

[DawnC]

Form 2555 (Foreign Earned Income Exclusion) calculates the amount of foreign earned income and/or foreign housing you can exclude from taxation.  Form 2555-EZ is a simplified version of this form.

Here's how to add or remove a Form 2555 or 2555-EZ from your return:

1. Sign in to TurboTax and open or continue your return.
2. Search for foreign income, then select the Jump to link in the search results.
3. Continue through the foreign income section until you reach Would You Like to Try and Exclude Your Foreign Earned Income? (if single), or Whose Foreign Income Would You Like to Try and Exclude? (if married).
   • Answer Yes to add a Form 2555 or 2555-EZ. We'll figure out which one you need.
   • Answer No to remove a Form 2555 or 2555-EZ.
4. Select Continue, and follow any instructions.

Tip: The -T or -S suffix after the 2555 stands for taxpayer or spouse, respectively.

Let's make sure it was entered correctly.  The exclusion amount should show on line 8 of Schedule 1 and Form 1040.  Please double-check.  Since you have other taxable income, after applying the exclusion, It is possible you might still owe if you did not have enough tax withholding and credits to cover your other income, California wages, etc.  

*** 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).    For more information and other rules pertaining to the Foreign Exclusion, click here.  

[ihatetaxes123123]

Thank you for your guidance. I followed your instructions, but TurboTax did not prompt me to add either a 2555 or 2555-EZ form. Instead, it indicated that a 1040NR form must be filed.

Furthermore, I noticed that my tax refund amount remains unchanged even after following the provided instructions.

Despite the absence of the 2555 form in the system, would filing it potentially alter our tax returns, resulting in a refund rather than owing money?

[DaveF1006]

The problem might be because you may have reported that your wife is not a US citizen or resident alien. She is a resident alien for tax reporting purposes since you made the election to have her treated as a resident alien.  

if you answered this question correctly stating she is not a US citizen but a resident alien, then there are other questions that appear that follow. As an FYI, I have included a screenshot of this extremely important question.

1. First if there was a income tax treaty, here you would say yes.
2. Then there is a question that asks if she qualifies for the Physical Presence Test or Bonafide Presence Test. Select these two links that explains what they are.
3. Then it asks for the 12-month qualifying period in accordance to the choice you made in the second step.
4. Then you would indicate the UK is her tax home.
5. Then it asks for trips abroad, indicating if whether or not she visited you in the US.
6. If these questions are answered correctly, your wife will qualify for the foreign income exclusion and a Form 2555 willk be added to your return.