MFJ with Spouse currently in China?

[EG&XY 144]

Sorry if this has been discussed previously, but I'm in a bit of a unique situation and want to get some feedback/guidance from anyone that might have experience with this.

 

My spouse and I (USC) got married last year (Oct 2016) so now I will be filling as married (obviously). We submitted our i-130 for CR-1 in Dec 2016 and are currently waiting for our NOA2, so he is still a resident of China and was in China for the entire year. However, he was previously in the US on a J-1 visa (left prior to 2016) and so he already has an SSN. The assumption is that filing as "married filing jointly" will be better for us and should be a little easier since he already has an SSN, plus his income (all from Chinese source) falls below the foreign earned income exclusion threshold so his income should not be taxed. So our questions are:

 

1) Is it as simple as filing with his SSN and then the appropriate documentation (Form 2555?) to get the exemption for his income?

2) Do we need some sort of documentation of his income to go with the documentation (Form 2555?) above? He doesn't have documentation that would be equivalent to a W-2. Or would we just have to wait for a request/audit from the IRS to provide supporting documentation of the income?

3) If we were to have to provide documentation of his income, what sort of documentation would likely suffice? Bank statements, etc? Unfortunately there is not clean/easy way to show this for his income.

 

Thanks for any insight/help that you can give.

[RandyW 149]

You do not need to "prove" his income - simply report. I suggest using the Form 4852, Substitute for Form W-2, Wage and Tax Statement,which provides the employers name, address and income.

 

The Form 2555 DOES NOT "Exclude" Foreign Earned Income - you REPORT and PAY TAXES on this income - albeit at a REDUCED RATE, depending on your own bracket. When using Form 2555 or 2555-EZ to report income, you must figure your taxes using the Foreign Earned Income Worksheet which is in the 1040 Instructions.

 

Just FYI in case it might be preferable - the married, filing separately status does NOT require that both spouses file a return if one is below the threshold.

 

When you file married, filing jointly, you need to report ALL income.

 

When you file married, filing separately, the foreign spouse does not need to report foreign-sourced income, unless he has filed a return in the past. See Publication 519, U.S. Tax Guide for Aliens and Publication 501 (for Filing Requirements) for more information.

[Wuozopo 4,285]

11 hours ago, EG&XY said:

 

2) Do we need some sort of documentation of his income to go with the documentation (Form 2555?) above? He doesn't have documentation that would be equivalent to a W-2. Or would we just have to wait for a request/audit from the IRS to provide supporting documentation of the income?

3) If we were to have to provide documentation of his income, what sort of documentation would likely suffice? Bank statements, etc? Unfortunately there is not clean/easy way to show this for his income.

The chances of the IRS ever asking you to "prove" that income through an audit are almost nil. If you have pay slips or bank statements to put in your saved stash of tax records for "just in case" then do that.  

 

The form 2555 asks for your foreign employer's name and address and your income anyway so a substitute W2 isn't really required to provide the same info.

[EG&XY 144]

Thanks for the help. I seem to have found someone here that has some experience with this and we are working on collecting all of the info that is necessary. I'll update later with what I learn from the process for other people's benefit.

 

@RandyW Thanks, I realize that filing as "married filing separately" would be much simpler, but my spouse already has a SSN from his previous time in the US on the J-1 visa and there can be significant benefits to filing jointly. From my initial estimate it seems like we might save ~$10,000-12,000 just by filing jointly. As I understand it, there are two options with foreign income if you meet certain "presence tests". In one case you claim your income and any taxes that you paid to the foreign government and the IRS will give you credit for the taxes that you already paid. However, there can be a second option (if you qualify for it) that allows you to claim the income but it is not taxed if the income is below the threshold. It seems that my spouses income would fall under the second option which is where we get a big benefit. As of now I just don't know what forms that goes with, I can update later once we complete the process.

[RandyW 149]

11 hours ago, EG&XY said:

Thanks for the help. I seem to have found someone here that has some experience with this and we are working on collecting all of the info that is necessary. I'll update later with what I learn from the process for other people's benefit.

 

@RandyW Thanks, I realize that filing as "married filing separately" would be much simpler, but my spouse already has a SSN from his previous time in the US on the J-1 visa and there can be significant benefits to filing jointly. From my initial estimate it seems like we might save ~$10,000-12,000 just by filing jointly. As I understand it, there are two options with foreign income if you meet certain "presence tests". In one case you claim your income and any taxes that you paid to the foreign government and the IRS will give you credit for the taxes that you already paid. However, there can be a second option (if you qualify for it) that allows you to claim the income but it is not taxed if the income is below the threshold. It seems that my spouses income would fall under the second option which is where we get a big benefit. As of now I just don't know what forms that goes with, I can update later once we complete the process.

 

 

You need to be aware of the Foreign Earned Income Exclusion Worksheet, which is in the 1040 instructions. THIS is where your taxes are figured, if you use the Form 2555 or 2555-EZ,

[Suss&Camm 2,213]

22 hours ago, RandyW said:

 

The Form 2555 DOES NOT "Exclude" Foreign Earned Income - you REPORT and PAY TAXES on this income - albeit at a REDUCED RATE, depending on your own bracket. When using Form 2555 or 2555-EZ to report income, you must figure your taxes using the Foreign Earned Income Worksheet which is in the 1040 Instructions.

 

The Foreign earned income is excluded - hence "foreign earned income exclusion". You don't pay taxes on the income itself, although as mentioned it might shift the tax bracket.

[RandyW 149]

An example - if you are in the 20% bracket by yourself, and your spouse has a Foreign Earned Income of $10,000, without the "exclusion", you would pay an additional $2000 in taxes on their income.

 

By using Form 255 or 2555EZ AND the Foreign Earned Income Worksheet (which you are REQUIRED to do), you would pay only $1000 in additional taxes on the income.

 

DO THE MATH YOURSELF. My point is - you NEED to be aware of the Foreign Earned Income Worksheet on page 43 of the 2016 Form 1040 instructions.

 

 

[Suss&Camm 2,213]

9 hours ago, RandyW said:

An example - if you are in the 20% bracket by yourself, and your spouse has a Foreign Earned Income of $10,000, without the "exclusion", you would pay an additional $2000 in taxes on their income.

 

By using Form 255 or 2555EZ AND the Foreign Earned Income Worksheet (which you are REQUIRED to do), you would pay only $1000 in additional taxes on the income.

 

DO THE MATH YOURSELF. My point is - you NEED to be aware of the Foreign Earned Income Worksheet on page 43 of the 2016 Form 1040 instructions.

 

 

Did the math. I was clarifying your use of language. The income itself is excluded. The tax bracket you end up in is determined by the entire household income, as with any other exclusion. That is the nature of an exclusion. It is not an exemption. As to your other point, naturally one should follow the instructions when doing one's taxes.

[RandyW 149]

The thing to notice is that Line  3 of the worksheet INCLUDES the Foreign Earned Income in the tax computation. That is why I take issue with the word "Exclusion"

Too many people assume it means that they don't have to pay taxes on the Foreign Earned Income or that " it is not taxed if the income is below the threshold ", and don't bother to use the worksheet.

[Suss&Camm 2,213]

16 minutes ago, RandyW said:

The thing to notice is that Line  3 of the worksheet INCLUDES the Foreign Earned Income in the tax computation. That is why I take issue with the word "Exclusion"

Too many people assume it means that they don't have to pay taxes on the Foreign Earned Income or that " it is not taxed if the income is below the threshold ", and don't bother to use the worksheet.

They don't pay taxes on the foreign earned income. The income is included when figuring the taxes only to determine the tax bracket. When you do the calculation the taxable income (on the 1040) is calculated on the total income minus the excludable income on 2555

 

The taxes are then figured by getting the amount of taxes from the tax table for:

1. the taxable income + the excluded income from 2555

2. the excluded income from 2555

and then subtracting 2 from 1... the actual taxable income is still what is being taxed. The taxes for the excluded income is added and then again subtracted... 

Edited March 13, 2017 by Suss&Camm

[RandyW 149]

28 minutes ago, Suss&Camm said:

They don't pay taxes on the foreign earned income. The income is included when figuring the taxes only to determine the tax bracket. When you do the calculation the taxable income (on the 1040) is calculated on the total income minus the excludable income on 2555

 

The taxes are then figured by getting the amount of taxes from the tax table for:

1. the taxable income + the excluded income from 2555 at 20% bracket

2. the excluded income from 2555 at 10% bracket

and then subtracting 2 from 1... the actual taxable income is still what is being taxed. The taxes for the excluded income is added and then again subtracted... 

In the example I gave,you subtract the tax on the Foreign Income at the 20% bracket. minus the tax on the Foreign Income at the 10% bracket.

 

That's why it amounts to a $1000 additional tax bill (in my example) due to the Foreign Earned Income. I think of it as a Foreign Tax Credit as if the foreign taxes were paid at the LOWEST US tax bracket, which is 10%

 

Again, just DO THE MATH.

Edited March 13, 2017 by RandyW

[Suss&Camm 2,213]

7 minutes ago, RandyW said:

In the example I gave,you subtract the tax on the Foreign Income at the 20% bracket. minus the tax on the Foreign Income at the 10% bracket.

 

That's why it amounts to a $1000 additional tax bill due to the Foreign Earned Income. I think of it as a Foreign Tax Credit as if taxes were paid at the LOWEST US tax bracket, which is 10%

 

Again, just DO THE MATH.

I'm not arguing against the outcome of your example or whether or not you should "do the math". For some situations the FEIE is less beneficial and of course each person need to figure out what's most beneficial to their situation. I am however, opposing the terminology you are using and that you are saying that it's not an exclusion and that ppl are paying taxes on the foreign income, which they are not.

Had the income been taxed..it had simply been included in the taxable income. Most ppl on here are using the 2555 since foreign income has to be reported, when they are choosing to file jointly. (As the OP). Since when filing jointly, you get an extra standard deduction and exemption, which reduces your taxable income with around $10k. It's not fair to claim that they are paying taxes on the income, when taxes is only payed on the taxable income. 

 

There is also a foreign tax credit... this reduces the taxable income dollar for dollar - this is not what the exclusion does. It is confusing to ppl reading when you are mixing terminology of something that can already be very confusing to understand.

 

If you want to inform ppl, use the correct terminology and inform them that they can end up paying more if the excluded income puts them in another tax bracket. How you think about it is irrelevant to other ppl, and it helps to be correct when using terminology when you are advising others on taxes. That is all I'm trying to get across.

 

Thank you /Suss

[RandyW 149]

27 minutes ago, Suss&Camm said:

I'm not arguing against the outcome of your example or whether or not you should "do the math". For some situations the FEIE is less beneficial and of course each person need to figure out what's most beneficial to their situation. I am however, opposing the terminology you are using and that you are saying that it's not an exclusion and that ppl are paying taxes on the foreign income, which they are not.

Had the income been taxed..it had simply been included in the taxable income. Most ppl on here are using the 2555 since foreign income has to be reported, when they are choosing to file jointly. (As the OP). Since when filing jointly, you get an extra standard deduction and exemption, which reduces your taxable income with around $10k. It's not fair to claim that they are paying taxes on the income, when taxes is only payed on the taxable income. 

 

There is also a foreign tax credit... this reduces the taxable income dollar for dollar - this is not what the exclusion does. It is confusing to ppl reading when you are mixing terminology of something that can already be very confusing to understand.

 

If you want to inform ppl, use the correct terminology and inform them that they can end up paying more if the excluded income puts them in another tax bracket. How you think about it is irrelevant to other ppl, and it helps to be correct when using terminology when you are advising others on taxes. That is all I'm trying to get across.

 

Thank you /Suss

 

 

The example I give DOESN'T put them in another tax bracket - they still pay extra taxes BECAUSE of the Foreign Earned income - I won't argue English language, OR arithmetic issues with you.

 

Just be aware of the Foreign Earned Income worksheet, and do the math.

 

Edited March 13, 2017 by RandyW

[Suss&Camm 2,213]

43 minutes ago, RandyW said:

In the example I gave,you subtract the tax on the Foreign Income at the 20% bracket. minus the tax on the Foreign Income at the 10% bracket.

Well, that is in fact what you said.

[Suss&Camm 2,213]

ANd calling something an orange when you are talking about how to make apples grow in an orchard, makes a difference..