Married Couple both US Citizens but Wife and Kids moved to India mid year for personal reasons, what is the filing status to use?

[Blueclouds]

We are a married couple and both US citizens. We typically use Turbo Tax to file our returns and use Married Filing Jointly status to file our taxes. Last year, my wife and kids had to make an urgent relocation to India in June to take care of ailing mother in law. 

She moved within her company to an Indian entity while I continue to work in US. We wanted to file takes separately, since my Wife's taxes will be handled by her employer as it involves part US and part India employment. 

I would like to file for my own taxes separately using TurboTax, which I have installed and ready to file. Can you please provide guidance on which filing status should I use? I am thinking Married filing separately in my case and only file for my portion of the taxes. Any guidance will be helpful. 

PS - I have applied extension and prepaid taxes when I filed for extension based on an estimate from last year filing. 

Thank you

[Blueclouds]

Thank you! Appreciate the support. 

[pk · Accepted solution]

@Blueclouds , Namaste ji

Having gone through your post, I would have the following suggestion:

1.  You can still  file as Married Filing Joint ( MFJ)

     (a)    Under personal income Tab, enter your W-2 details.

     (b)    Then  ( I think it is next screen ), choose  "I will choose what I work on".  This would then  provide you a list of different types of incomes  ( grouped by major categories)  Go down the list till you see  Foreign Earned Income and Exclusion -- FEIE.

      (c)   Select FEIE and now you will be asked questions about your wife's income etc.  This is filling out form 2555 ---> Her Tax home is   India, Her total Foreign Income in US$, when did she arrive in India  XX/XX/XXXX, when did she establish Foreign Tax home ( the first 24 hr day after arrival, because  you arrive in India  early in the morning, few hrs. past mid-night etc. )  Go through all the screens carefully.    What you should end-up with is that her income is all  excluded from US taxes.  Go to forms mode and make sure that this is so.

      (d)     You will essentially end -up paying US taxes ONLY on your income except that your tax rate would be a bit higher -- because it uses the world income for the couple to  compute tax bracket and then deducts  the US taxes allocated to her excluded income.  This also allows the standard deduction for MFJ and not MFS.

 If you need more help on this , you can add to this thread or PM me ( if the questions are not of interest to general user -- just NO personally Identifiable  Information).

Is there more I can do for you ?

Namaste ji

pk

[Blueclouds]

Thank you @pk ji! thank you for your guidance and support. I will follow your instructions and get back to you if I have any questions. 

One question I have:  Is married filing jointly preferable over married filing separately in my case? I am asking because, my wife's employer is taking care of her taxes this year through a third party accounting firm.  Please let me know. 

Thank you!! 

[pk]

@Blueclouds  my two cents ( and if I assume that  your wife will eventually come back to USA and work  either at the same entity or a different on),  would be  to let the accounting firm do the her Indian filing  ( as only she would have Indian tax liability, and you do the  US return covering MFJ.  I say this  because when she comes  back  you will have to pick-up from  what the accountant have done for her US filing ( She as a US person is taxed on her world income for the calendar year by the USA and Distinct from her Indian taxes.   I fully understand that this will be hard on you now but is better prepared for later.

The other option is  you file as MFS, do your own taxes  (  not that  your state taxes may get a bit confusing  if you live in a community property state like CA ).  Then   when her filings are  completed, you do a dummy prepare it again on your own for the wife --  this way you will be familiar with  what was done by the accountants.  Will make the future transition easier.

If you have time you could try it both ways  and see which is more tax beneficial --  doing it as joint will raise your tax bill a bit ( higher  marginal tax rate possibly ) but doing  MFS will reduce  your  own  deduction.  I say this because depending your  individual  world incomes  it may or may not make a huge difference.

I hope this helps.

Namaste ji

pk

[Blueclouds]

@pk ji, Thank you so much! you have been extremely kind and supportive. Just wanted to understand your instructions correctly and please confirm. 

- Recommendation is to Married Filing Jointly

- I have a W2 for myself 

- I have a W2 from my wife for the portion of time in 2023 (Jan to May) when she worked in US

- I have my wife's  Indian tax return for the portion of time in 2023(Jun-Dec) when she worked in India

So in Turbo Tax, I would do MFJ and enter both of our W2s. 

I will then use FEIE - Foreign Earned Income and Exclusions to enter the Indian Income for my wife from Jun to Dec. 

By doing this, I assume it will account for the world income for my wife, and we will be paying taxes only for our W2 income is US and the Indian Income will be excluded as the taxes already paid to India on Indian income. 

I hope my understanding is correct, please confirm. 

Thank you

[Blueclouds]

Hello @pk ji, I followed the instructions, 

- Did MFJ

- Entered both US W2s

- Entered India Income under FEIE

The overall tax due substantially increased, which is fine because the overall income increased when adding India Income. 

However, It did not exclude the entire India income and it only excluded ;around 40% of it. 

Also please let me know where do I report the taxed that were already paid on the India Income during India tax filing?

Thank you

[pk · Accepted solution]

@Blueclouds , 

(a) under wages you ONLY enter the two W-2 s

(b) Under Foreign Earned Income Exclusion you enter the  Foreign income that is included for the  period in the  tax year  ( as you said  June xx till 12/31/2023 )

(c) When you are filling out the form 2555 that determines the  exclusion  amount, your  12 month  test period  would be Jun XX+1 ( i.e. the day after she arrived in India ) 2023 to JunXX+1 , 2024.  This would exclude the maximum that you can and that is earning from 2023.

(d) your actual tax rate will also go up a little because you will pushed into a higher bracket.

(e) Also note that  if she is NOT participating in  India  Social Security equivalent, then  for the earnings in India she will/may also be liable for the 15.3%  of her foreign income as Self-Employment  Tax ( FICA here in the US for wage earners but at double the rate.

(f)  Because US is not taxing the foreign income ( up to the excluded  income amount) there is NO Foreign Tax Credit on that --- only the foreign tax  unexcluded  income ( i.e. is being taxed by both USA and India )  is eligible for foreign tax credit.

 Is there more I can do for you ?

[VballGirl66]

Curious why you wouldn't want the accounting firm to handle both the US and Indian tax filings?  I don't find Turbo Tax to be user friendly when calculating the foreign earned income exclusion and foreign tax credit.

That said, agree with everything above that you can continue filing MFJ, claiming dependents etc.  Your spouse's earnings are eligible for exclusion once she meets either the physical presence test (330 days/365 day period.  This is a rolling 12 month period.  Assume she met this by 10/15/24) or bona fide residence being their a full calendar year.  You are only eligible to exclude income for the qualifying days in India.

[pk · Accepted solution]

@VballGirl66  an interesting question.   Clearly I am biased to  taxpayers doing their own taxes  to the extent of their ability or feeling of security.

In this particular case, where H is resident in the US and has ONLY US tax filing requirement and the S has both US and Indian Income and therefore  tax filings for both countries, the options  are :

(a)    (1)   Each  taxpayer files his or her own returns for both the USA and India --  MFS for the tax year 2023 or 2024  i.e., till they are both back in the same country.  This would allow the H to  file as usual and the S would use  accounting firm ( very familiar with  India taxes  but may or may not be familiar with the US taxes ).  Additionally the accounting firm's business connection  is with the Indian entity. 

           (2) This would still leave the  H + S to  reorganize and pick-up the filings again when S returns back to USA -- a formidable effort often .  Everything has to be co-related and copacetic.

I say this from experience  , when I was  employed overseas by a US Multinational.  Coopers & Lybrand took care of my US and local/national filings. An additional component was  gross -ups.  It took me two years  of  recreation of their work so that I could take over once their support vanished.  Therefore , I see  this as a major impediment to getting back to your own.  And this case is reasonably simple.

(b)   The other option is as I described do all the USA ones  ( which will be carried forward  after S returns to USA  and the basis for ) and let the accountants do the  Indian one ( they are much  familiar with that  ).

I have nothing against accountants and/or tax professionals ( I was one for many years ) doing your taxes.  However , I do think given that the  availability of good stable tax software ( accountants also use  very similar products without "step-by-step " feature )  makes it  reasonable for most taxpayers to do their own.  Additionally , in case of a challenge by the IRS, it is the taxpayer whom is on the hook  ( defense by a CPA or  EA or Tax Attorney is extremely expensive ).

You asked  and so I responded --   granted this is my opinion only    ( nothing to do TurboTax or any other entity ).

pk

[Blueclouds]

Thanks to both @pk and @VballGirl66 

I learned a lot from this interaction and I feel a bit more confident in filing following your instructions and recommendations. 

I did MFJ, made use of FEIE, I think TurboTax Premier handled it well. I have forwarded the returns to the accounting firm supporting my wife for a review and any amendments needed. 

Thank you @pk ji! you have been great support!