I live in Beijing with my wife/three stepchildren. Wife is a Lithuanian national with no US income. I am a freelance web developer. How should I file, what can I claim?

[illiterategenius]

Can I qualify for the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction? What about my stepchildren? Do my wife and stepchildren need ITINs?

[LinaJ2020]

Are you a US citizen or resident?  

[illiterategenius]

Yes, I am a U.S. citizen.

[pk]

@illiterategenius , having seen your response to @LinaJ2020 , 

(1) yes your net income, as a self-employed is eligible for  Foreign Earned Income exclusion  ( your tax home is foreign **,   the work is performed  in your tax-home and your source of income  is foreign)

(2) foreign housing expenses etc. are recognized only to the extent that the allowed differential amount for Beijing / China is used to bring up your total exclusion to the max allowed for the  tax year i.e. housing expenses  do not increase the maximum allowed.

(3) as self-employed you still will have to pay the self-employment tax   (   SECA,  equivalent to FICA for the wage   earners ) on the net self-employment income. TurboTax will complete the schedule-SE and give you an adjustment of 50% of the SECA to your gross.

(4) if you want to file Married Filing Joint, then  (a) you need ITIN for your wife  (b) you both have to sign a statement that you agree to have her world income come under US taxation -- the same  Foreign Earned Income exclusion will also apply to her i.e. she gets to exclude her world income just like yours ; (c) you can file for her ITIN along with your return -- suggest you visit the nearest US consulate  and speak to the IRS branch for help in expediting

(5) to be able to claim the children, ONLY if you file jointly-- (because she is the mother OR  you have adopted the children), you need ITIN for each child.

(6) any income not excluded and if taxed by China ( as income tax ), would b eligible  for foreign tax credit

Does this answer your query ?

[illiterategenius]

Hi @pk , thank you for the response.

(1) yes your net income, as a self-employed is eligible for Foreign Earned Income exclusion ( your tax home is foreign **, the work is performed in your tax-home and your source of income is foreign)

My income source is actually from America, so I don't suppose I qualify for this.

One follow up question...this question in the TurboTax software is a little vague:

How much of your Website development work took place within the United States? And then the follow up to this question is How much of your total income and total expenses was from your foreign office?

85% of my work took place in China, however, the money was paid by a domestic entity. 

The help file says "One of the requirements is that the income is based in the United States." The income is based in the United States. 

Thanks,
Matt

[pk]

@illiterategenius ,  generally if the work is performed  at a foreign  site   while you are a resident of that place   ( satisfying the  Physical Presence test ), the  income  is sourced as foreign  -- except  for payments by the US govt or any of its branches.  Thus your income in China  is sourced to China.   The  15% of the work that was done  on mainland US ( or its possessions ) would be classed as  US sourced.

The closer connection to China  becomes even stronger if China considers this  local income and taxes it.

I missed  including the NB that goes with  the ** above -- it should have said  if and only if  you pass the  Physical Presence Test or a Bona-fide Resdient approval from the IRS.

Does this clear up things ?