taxes anyone?

[rst]

Am I the only one who's been procrastinating? Here's my situation, which I assume is pretty typical. My K-1 fiancee arrived in November and we were married in December. The best option of course is to file "Married Filing Jointly". If we choose this option, it's clear from the IRS website we need to report what she made last year in China, which wasn't much -- and which can be excluded using the "foreign earned income exclusion" option. It also means we need to attach a statement to our tax return saying we're electing to treat her as a resident alien for 2011 tax purposes. Having to attach the statement means we can't file electronically, but that's only a minor inconvenience.

So far so good? My question is this. When we ask others in the local community what they did the first year they were married, to a couple they all say: we didn't report any foreign income... no one ever reports any foreign income. The problem this is causing is my wife is really starting to think I'm off my rocker. I try to explain what I've learned and what seems very simple and clear to me: if you want to file jointly, you're required to report both incomes. But when everyone she talks to tells her "no one ever does that", I don't know what to say.

So back me up. Tell me I've interpreted the tax rules correctly and that we won't be alone if we go through the additional steps to [a] report her income, exclude it using the foreign earned income exclusion, and [c] attach a signed statement saying we're electing to treat her as a resident alien for the 2011 tax year.

Or... tell me I'm off my rocker. It won't be the first time I've heard it this week

[2mike&jin]

You are not OFF YOUR ROCKER. The choice of FIrst Year Election and to File JOintly, making both of your world-wide Income taxable in the US is a "Choice". We did the exact same thing....and yes I had to list some of her income from China. She entered in Oct and we filed first year with our taxes the following April. Some people report, some take a first year election to be treated that way all year, and some choose to file jointly. It's a personal choice, but some of us make it anyway. There are slightly cheaper ways - in some cases, especially if you don't report the income. However that is not my way.

 

I wanted to have my 2008 taxes, show that we filed jointly, together, and to be treated as residents of the US. Others do not feel as strongly about this as I do.

There are exclusions to income as well for some foreign income so they may come into play...as well as the ability to file married and separately. You will have to make the decision based on your individual situation - but know that some, a lot, of us declare "EVERYTHING and thought that filing together in the first couple of years back was important". In hindsight - I sure I overstated the need, but I was in the don't take a chance mode with USCIS.

 

ALSO, to those that I said I would let all know about moving "Larger Sums" of money from China to the US, it's still a work in progress. I was able to get my online account all filled out ready to transfer $50K from the CHina Bank to a US bank, and the computer prompted me for am SMS PIN and a Token Pin. I had the TOKEN generator in my hand, but the SMS was supposed to flow from the BANK to my CHINA TELEPHONE. I push the "Generate Button" and nothing arrived on the phone. I was stuck. My wife called, and the Bank Manager said - OH, that doesn't work anymore, we have changed how it works...you need to send in your ATM card, we need update your ACcount and Card. So I'm in the FEDEX to the Brother mode to get it refreshed to see if I can get it done. I will report the failure or success of larger money moves.

[Randy W]

As I understand the IRS-ese about the 'First year choice', you MAKE that choice when you file married-filing jointly, so the separate declaration is unnecessary (that's MY OWN understanding).

 

If you FAIL to report any income - well, it's unlikely they'll find out about any income in China, but I'm with Mike here. This is one case where filling out your return honestly (most likely) won't cost you anything. I'm also a believer in what I call "IRS brownie points", which you can earn by reporting (and excluding) this income. Otherwise, you leave a hole in her income history which might get some attention.

[credzba]

I agree with most that although it is a "choice", not filing jointly has a negative impact both financially, and potentially at remove conditions stage.

 

As for the Chinese income, I look at it this way:

1) There is no way US IRS will ever know about the income.

2) Even if they DID know, it isn't worth following up on because the net change to the tax payment is zero.

3) Even if they DID follow up on it, any penalty would be zero, because the penalty is based on the failure to pay taxes, not on the "mistake" made on a form.

 

So, in my mind you should of course "choose" to file jointly, but whether you include to Chinese income or not is pretty much a moo point (one only a cow cares about).

[Randy W]

I agree with most that although it is a "choice", not filing jointly has a negative impact both financially, and potentially at remove conditions stage.

 

As for the Chinese income, I look at it this way:

1) There is no way US IRS will ever know about the income.

2) Even if they DID know, it isn't worth following up on because the net change to the tax payment is zero.

3) Even if they DID follow up on it, any penalty would be zero, because the penalty is based on the failure to pay taxes, not on the "mistake" made on a form.

 

So, in my mind you should of course "choose" to file jointly, but whether you include to Chinese income or not is pretty much a moo point (one only a cow cares about).

 

2) and 3) are not correct - if you fail to file the foreign income exclusion, it can be denied, and you DO owe the back taxes.

 

But yes, # 1 probably holds sway and yes it's your choice whether to report the income or not.

[rst]

Thanks for all the replies. I'm definitely in the honesty is the best policy camp. As a technical note, because of how the IRS has structured the foreign earned income exclusion, there's still a small hit you take in reporting the foreign income and then excluding it, due to the tax obligation being calculated on the combined income, and the exclusion being calculated only on the foreign income. But it's only a small hit. Randy W, I'm curious, what makes you think you don't need to attach the first year choice statement? I'd prefer to file electronically of course. 2mike&jin, did you attach a first year statement to your 2008 return? Thanks again.

[dnoblett]

Our first year return was a joint one, Visa interview was early March 07, wife pretty much had left her job early January, so we simply reported income from work in the USA after arriving in the USA. Never was questioned, and we did have a CPA do that return.

[Randy W]

Thanks for all the replies. I'm definitely in the honesty is the best policy camp. As a technical note, because of how the IRS has structured the foreign earned income exclusion, there's still a small hit you take in reporting the foreign income and then excluding it, due to the tax obligation being calculated on the combined income, and the exclusion being calculated only on the foreign income. But it's only a small hit. Randy W, I'm curious, what makes you think you don't need to attach the first year choice statement? I'd prefer to file electronically of course. 2mike&jin, did you attach a first year statement to your 2008 return? Thanks again.

 

No - it's subtracted directly from your income on line 21 - before you calculate your Adjusted Gross Income - NOT after figuring taxes

Foreign earned income exclusion. Enter the smaller of line 16 or line 17 here and in parentheses on Form 1040, line 21.

 

A nonresident alien who is married to a U.S. citizen or resident can choose to be treated as a resident and file a joint return on Form 1040, Form 1040A, or Form 1040EZ.

 

. . .

 

You generally make this choice when you file your joint return

 

So MY INTERPRETATION is that the CHOICE is available to aliens who MAY CHOOSE to be treated as U.S. residents. This choice is NOT available to AMERICAN citizens or LPR's. By filing married-filing separately, your non-resident wife may file as an alien, or she may CHOOSE to be treated as a U.S. Resident. By filing married-filing jointly, this choice is NOT available - you AND her are both treated as U.S. residents, since YOU are an American citizen.

 

Again, that's my own interpretation, which I don't care to defend - the wording is ambiguous enough. If you believe me AND convince yourself that what I say is correct, you may be able to file electronically. If you decide you're not sure, or you DON'T believe me, go ahead and mail in the statement with your tax return. I won't be offended and you might sleep better. Your choice.

 

Again, though, if you ARE treated as a resident, you ARE required to report your world-wide income from ANY source - but yes, you (and many others) can get away with not doing so.

[rst]

Aren't taxes fun? I'm using Turbo Tax and you're right about the foreign income being subtracted on line 21. But where you take the hit is on line 44, where you enter the tax obligation. In Turbo Tax that number comes from a special "Foreign Earned Income Tax Worksheet", where the calculations are as I described: first figure tax on the combined income, then subtract tax on the foreign income. In my case, and in most cases I'd imagine, the two don't net out: the incremental tax on the combined income is more than the tax on the foreign income alone.

 

On attaching the statement, I'm very willing to be persuaded and I see your logic. The publication you reference is very clear that if you make the MFJ choice, you're both treated as residents, and must report total combined income. I'll chew on it a little more.

 

Thanks again.

[dnoblett]

Aren't taxes fun? I'm using Turbo Tax and you're right about the foreign income being subtracted on line 21. But where you take the hit is on line 44, where you enter the tax obligation. In Turbo Tax that number comes from a special "Foreign Earned Income Tax Worksheet", where the calculations are as I described: first figure tax on the combined income, then subtract tax on the foreign income. In my case, and in most cases I'd imagine, the two don't net out: the incremental tax on the combined income is more than the tax on the foreign income alone.

 

On attaching the statement, I'm very willing to be persuaded and I see your logic. The publication you reference is very clear that if you make the MFJ choice, you're both treated as residents, and must report total combined income. I'll chew on it a little more.

 

Thanks again.

Yep!

 

Don't you just love the overly complex mess of a tax code the USA has? It would be simpler to toss the entire complex mess and start over with a simple flat income tax, and sales tax. And simplify the yearly filing.

[2mike&jin]

Thanks for all the replies. I'm definitely in the honesty is the best policy camp. As a technical note, because of how the IRS has structured the foreign earned income exclusion, there's still a small hit you take in reporting the foreign income and then excluding it, due to the tax obligation being calculated on the combined income, and the exclusion being calculated only on the foreign income. But it's only a small hit. Randy W, I'm curious, what makes you think you don't need to attach the first year choice statement? I'd prefer to file electronically of course. 2mike&jin, did you attach a first year statement to your 2008 return? Thanks again.

YES I WROTE A LETTER OUTLINING THE CHOICE, (Got a sample or directions somewhere probably IRS) AND ATTACHED TO THE 1040.

[Randy W]

Aren't taxes fun? I'm using Turbo Tax and you're right about the foreign income being subtracted on line 21. But where you take the hit is on line 44, where you enter the tax obligation. In Turbo Tax that number comes from a special "Foreign Earned Income Tax Worksheet", where the calculations are as I described: first figure tax on the combined income, then subtract tax on the foreign income. In my case, and in most cases I'd imagine, the two don't net out: the incremental tax on the combined income is more than the tax on the foreign income alone.

 

On attaching the statement, I'm very willing to be persuaded and I see your logic. The publication you reference is very clear that if you make the MFJ choice, you're both treated as residents, and must report total combined income. I'll chew on it a little more.

 

Thanks again.

 

Oh - I missed that in the instructions, but I see the Foreign Earned Income Tax Worksheet in the 1040 instructions now. Thanks for pointing it out. Interesting that it's not mentioned in the 2555EZ instructions. No wonder I missed it.

 

That changes the picture quite a bit - an American citizen with $60,000 of taxable income (after deductions and exemptions) would pay $8,166 in (2010) taxes. Adding an excluded foreign income of $5000 would change the tax to $8,916. The tax on just the $5,000 is $503. Using the Foreign Earned Income Tax Worksheet would give $8916 - $503 = $8413, for a tax penalty of $247 for reporting the foreign income.