How to Report Spouse’s Foreign Self-Employment Income in MFJ

[pk · Accepted solution]

@kruthika , sorry if I missed to answer that query explicitly --- FEIE is for all earned/ active income == wages  from qualified employer  ( i.e. foreign /private employer );  Self-employed earnings ( including sole proprietorship ).  When in retail / manufacturing, there is a fine line ( especially in India , where the owner's role is more like an investor and rarely "hands on" ).

My ref.   From   26 U.S. Code § 911 - Citizens or residents of the United States living abroad | U.S. Code | US Law |...

"  2.   Earned income

(A)In general

The term “earned income” means wages, salaries, or professional fees, and other amounts received as compensation for personal services actually rendered, but does not include that part of the compensation derived by the taxpayer for personal services rendered by him to a corporation which represents a distribution of earnings or profits rather than a reasonable allowance as compensation for the personal services actually rendered.

(B)Taxpayer engaged in trade or business

In the case of a taxpayer engaged in a trade or business in which both personal services and capital are material income-producing factors, under regulations prescribed by the Secretary, a reasonable allowance as compensation for the personal services rendered by the taxpayer, not in excess of 30 percent of his share of the net profits of such trade or business, shall be considered as earned income."

Hope this clarifies the situation.  Is there more I can do for you ?

pk

[kruthika]

Thanks @pk for clarifying. 

[kruthika]

Hi @DaveF1006, I have completed all the steps as you mentioned in your thread. 

     1. Reported the my spouse business income in Schedule C 

     2. Reported the Farm income in Schedule F (Since he is actively involved and SE tax is calculated for this income too)

     3. In FEIE section he did qualify for exclusion so I put all the gross income from both & deducted 1/2 of SE tax. 

     4. In federal review page, it shows as - Other income, -$5,305 

    It looks like the amount I entered in FEIE after minus of 1/2 SE tax it is showing up as other income with minus sign.

My question in your thread you have instructed to do as below:

After this is complete, you will exclude the net income amount by doing this. 

1. Select Wages and income
2. Less Common income
3. Miscellaneous Income, 1099-A, 1099-C
4. Scroll to the bottom of the page to Other Reportable Income
5. Other taxable income, answer yes
6. Then give a brief description of the income and the amount listed. Here you will list this as Foreign Self-employment income excluded and record the net income as a negative number by placing a minus sign in front of the amount. 

Do I still need to do this manual exclusion ? Or is it not required as turbo tax will handle it on its own. Looking forward to your guidance. 

[DaveF1006]

 It depends.  This is how you will enter the information in the return.

1. When you complete the foreign income exclusion section.  You would enter the full Gross amount of the foreign income. You wouldn't deduct 1/2 of self-employment tax. Just enter the full, gross amount of self-employment income and farm income. Don't deduct business or farm expenses in this section.
2. Next, you will prepare Schedule C and Schedule F. After this is prepared, you will exclude the net income generated by both returns by the order of steps I have prescribed. After the income is excluded, the only remains is the self-employment tax and 1/2 of the self-employment tax.  

@kruthika 

[kruthika]

Thanks @DaveF1006 for replying back. I completed both the steps as mentioned in your thread. But one slight change in step 1 alone when I enter FEIE full gross income in turbo tax it automatically deducts 1/2 SE tax in the next deductions page and rest all the same. What would you suggest as next step? 

[DaveF1006]

No. Don't do anything. ‌Leave it as such if it automatically deducts 1/2 SE tax as used in the calculation.

@kruthika 

[kruthika]

Thanks @DaveF1006. My question is in your previous thread you have advised to do as below

After filling the schedule C, Schedule F & FEIE is complete, you have asked to exclude the net income amount by doing this. 

1. Select Wages and income
2. Less Common income
3. Miscellaneous Income, 1099-A, 1099-C
4. Scroll to the bottom of the page to Other Reportable Income
5. Other taxable income, answer yes
6. Then give a brief description of the income and the amount listed. Here you will list this as Foreign Self-employment income excluded and record the net income as a negative number by placing a minus sign in front of the amount. 

Do I still need to do this manual exclusion ? Or is it not required as turbo tax will handle it on its own. Looking forward to your guidance. 

[DaveF1006]

No, you will need to manually exclude you as I described.

@kruthika 

[kruthika]

Sorry @DaveF1006 for troubling you. Thanks for replying back always & having patience with me. Can you please elaborate one last time the steps/explain about what you mean by this statement - "You will need to manually exclude you as I described"? Won't that be double dipping ? Since Turbotax might deduct the FEIE amount automatically. 

[DaveF1006]

No, it wouldn't be double-dipping because all you are doing is reporting the incomes in Schedule C and Schedule F to determine the self-employment tax. Since the income from both is excludable income on form 2555, you will wish to exclude the net income generated by these two forms, just leaving the self-employment tax to be reported on the return. 

The self-employment tax isn't calculated in the FEIE section thus you need to prepare a Schedule C and Schedule F to determine the self-employment tax and then exclude the net income generated by both schedules, leaving just the self-employment tax in the return.

@kruthika 

[kruthika]

Yeah I understand that filing FEIE is necessary but I'm confused in my scenario whether the manual step to exclude the net income as you mentioned in your previous thread is needed or not? @DaveF1006 

Are these manual steps to exclude the net income amount is needed or not? 

1. Select Wages and income
2. Less Common income
3. Miscellaneous Income, 1099-A, 1099-C
4. Scroll to the bottom of the page to Other Reportable Income
5. Other taxable income, answer yes
6. Then give a brief description of the income and the amount listed. Here you will list this as Foreign Self-employment income excluded and record the net income as a negative number by placing a minus sign in front of the amount. 

[DaveF1006]

Yes, as I have stated before, when you compute net income from Schedule C and Schedule F to determine your self-employment tax, it's necessary to exclude the net income because it's excludable foreign income. 

Think of it in the following manner. If you have already excluded the foreign income using FEIE, why would you add it back in again to be taxable? It doesn't make sense. 

Remember, you are only preparing a Schedule C and Schedule F in Turbo Tax strictly to determine Self-employment tax. Then you back out the net income from both Schedules and as a result, only the self-employment tax remains and the income is excluded. 

Your FEIE section doesn't calculate self-employment tax. This is why you need to prepare both Schedule C and Schedule F to calculate the tax and then remove the net income in the way I prescribed.

@kruthika 

[pk]

@kruthika  having followed this thread and absolutely agreeing with the suggestions/ instructions  etc. from my colleague @DaveF1006 ,  I am just curious as to what you are trying to achieve.  ( I recognize  this is not the right forum for such discussions -- a PM is  some what more appropriate.). 

As I see it  you are  putting in a lot of work  ( exposing your spouse's world income  to US taxes , essentially for ever) for the benefit of MFJ  filing status only-- that being  a couple's standard deduction if you meet the full calendar year residency.   You are also paying the SECA  taxes, the benefits of which are  iffy unless  you both  are able to settle down in the USA.  Only you can judge  the actual benefit and obviously it is  your choice.  

Perhaps, before  you file there is a need for some discussion with a  tax professional familiar with international tax laws and  implications thereof.  I say all of this because I am not sure I understand  your  longer term goal here.  These are very serious choices and  often there is no  way to undo or redo.

If I am stepping on toes , please forgive.

Namaste ji

pk

[kruthika]

Thanks @pk for the heads up! I have analysed the pros & cons and then I have taken my decision. 

[kruthika]

@DaveF1006 I understand the logic I have listed out the two scenarios below please let me know which is correct. 

Scenario 1 -

  1. Completed - Schedule C  

  2. Completed - Schedule F

  3. Completed - FEIE Section 

Results - Turbo tax shows me 

    - Business income : $4,788

    - Farm income : 921

    - Other income : -5305 ( FEIE gross income total of business income & farm income minus 1/2 of SE Tax applied by turbo tax automatically ) 

All these calculated automatically by turbotax from my schedule C & F & FEIE sections. 

Scenario 2 -

  1. Completed - Schedule C  

  2. Completed - Schedule F

  3. Completed - FEIE Section 

  4. Completed manual deduction as Less Common income -> Miscellaneous Income, 1099-A, 1099-C  -> Other Reportable Income -> Other taxable income, answer yes  -> Foreign Self-employment income excluded and record the net income as a negative number.   [ Net income:  -5709 no expenses I'm not claiming any expenses for both the incomes ]

Results - Turbo tax shows me 

    - Business income : $4,788

    - Farm income : 921

    - Other income : -11014 ( Sum of manual net income amount entered with minus sign & FEIE sections gross business income & farm income minus 1/2 of SE Tax applied by turbo tax automatically ) 

Please let me know which scenario is correct. Looking forward to your guidance.