Form 2555 vs. Form 1116

[Randy W]

 

 

 

It depends on where the money came from. If it's income from work in China, or was subject to any China tax, then you cannot be taxed again by the US, at least up to certain amounts.

 

See: http://www.irs.gov/taxtopics/tc856.html

 

If you need to transfer a large amount of cash from China to the USA, there is a law in China that allows a Chinese person to transfer up to $50,000.00 USD per year to a foreign bank. If you have a large amount that is in excess of this 50K, you can recruit Chinese citizens to assist you. To complete this, you will need a savvy Chinese interpreter, familiar with Western culture and Chinese banks. The process may take a couple of hours, but gets the job done.

 

 

Jesse, can you elaborate on when you would use the Form 1116, instead of Form 2555? Or can you use both forms at the same time? That is, can you "exclude" income through Form 2555, and take the Foreign Tax Credit on Form 1116 for any taxes paid to the Chinese government at the same time?

 

I know, for most of us, our Chinese earned income (as English teachers) is less than a taxable amount in China, but may still be "excluded" on Form 2555. With no Foreign Taxes to claim, we do not file Form 1116.

[Guest ExChinaExpat]

Jesse, can you elaborate on when you would use the Form 1116, instead of Form 2555? Or can you use both forms at the same time? That is, can you "exclude" income through Form 2555, and take the Foreign Tax Credit on Form 1116 for any taxes paid to the Chinese government at the same time?

 

I know, for most of us, our Chinese earned income (as English teachers) is less than a taxable amount in China, but may still be "excluded" on Form 2555. With no Foreign Taxes to claim, we do not file Form 1116.

 

I'm not sure of the specific forms needed to file US taxes for foreign income. I am quite sure however that every US citizen must file a tax return every year. There is a lot of misinformation out there among US expats that you do not need to file an income tax return if you make less than the amount currently stipulated by the US government, which I think if over 90K USD per year. I surely did not fall into that category.

 

To avoid confusion, I hired a tax accountant familiar with foreign income when I was in the US a few months back. She assisted me in filing four years back tax returns and amending a return from 2008. She used form 1040 for the appropriate year, and also form 2555-EZ (Foreign Earned Income Exclusion). When I asked her whether I would have to pay tax on my income during my five years working, she asked:

 

"Did you pay tax in China for that income?"

The answer was: "Yes, absolutely; every single pay period."

 

She then said:

"Then, you do not have to pay tax on foreign income if you have paid taxes in China. That would be double-indemnity."

Edited November 17, 2013 by GuangDongExpat (see edit history)

[Guest ExChinaExpat]

U.S. citizens and resident aliens abroad

The U.S. requires its citizens to file tax returns reporting their earnings wherever they reside. However, there are some measures designed to reduce the international double taxation that results from this requirement.[4]

First, an individual who is a bona fide resident of a foreign country or is physically outside the United States for an extended time is entitled to an exclusion (exemption) of part or all of their earned income (i.e. personal service income, as distinguished from income from capital or investments.) That exemption is $97,600 for 2013, pro-rated.[4] (See IRS form 2555.)

Second, the United States allows a foreign tax credit by which income taxes paid to foreign countries can be offset against U.S. income tax liability attributable to foreign income. This can be a complex issue that often requires the services of a tax advisor. The foreign tax credit is not allowed for taxes paid on earned income that is excluded under the rules described in the preceding paragraph (i.e. no double dipping).[4]

http://en.wikipedia.org/wiki/Double_taxation

[Randy W]

 

Jesse, can you elaborate on when you would use the Form 1116, instead of Form 2555? Or can you use both forms at the same time? That is, can you "exclude" income through Form 2555, and take the Foreign Tax Credit on Form 1116 for any taxes paid to the Chinese government at the same time?

 

I know, for most of us, our Chinese earned income (as English teachers) is less than a taxable amount in China, but may still be "excluded" on Form 2555. With no Foreign Taxes to claim, we do not file Form 1116.

 

I'm not sure of the specific forms needed to file US taxes for foreign income. I am quite sure however that every US citizen must file a tax return every year. There is a lot of misinformation out there among US expats that you do not need to file an income tax return if you make less than the amount currently stipulated by the US government, which I think if over 90K USD per year. I surely did not fall into that category.

 

To avoid confusion, I hired a tax accountant familiar with foreign income when I was in the US a few months back. She assisted me in filing four years back tax returns and amending a return from 2008. She used form 1040 for the appropriate year, and also form 2555-EZ (Foreign Earned Income Exclusion). When I asked her whether I would have to pay tax on my income during my five years working, she asked:

 

"Did you pay tax in China for that income?"

The answer was: "Yes, absolutely; every single pay period."

 

She then said:

"Then, you do not have to pay tax on foreign income if you have paid taxes in China. That would be double-indemnity."

 

 

That's why I don't trust tax accountants - I would rather understand the laws and forms myself. I don't believe "double indemnity" is a tax term.

 

From your next post, this is the terminology the IRS uses

measures designed to reduce the international double taxation

 

But my question was about the Form 1116 - did you file that also? I'm sure the 2555 was enough in your case, so I expect you did not. But it allows an actual CREDIT for taxes paid, which may be separate from the "Exclusion" claimed on form 2555.

[Guest ExChinaExpat]

 

 

But my question was about the Form 1116 - did you file that also? I'm sure the 2555 was enough in your case, so I expect you did not. But it allows an actual CREDIT for taxes paid, which may be separate from the "Exclusion" claimed on form 2555.

 

 

Only the form 2555-EZ and the 1040 for the back taxes. For the amended year, 1040X and form 1116.

[Randy W]

Here's my answer (found in your last post above):

 

The foreign tax credit is not allowed for taxes paid on earned income that is excluded under the rules described in the preceding paragraph (i.e. no double dipping)

 

So you CANNOT claim a tax credit for foreign taxes paid on income that you've "excluded" using the Foreign Earned Income Exclusion - assuming Wikipedia is correct, which I expect is the case here.

 

The link you provided points to information about the Foreign Tax Credit, NOT the Earned Income Exclusion - that's why I was curious.

 

I've had Foreign Taxes Paid reported on 1099's which WOULD go on the 1116.

[Randy W]

 

 

 

 

 

 

But my question was about the Form 1116 - did you file that also? I'm sure the 2555 was enough in your case, so I expect you did not. But it allows an actual CREDIT for taxes paid, which may be separate from the "Exclusion" claimed on form 2555.

 

 

Only the form 2555-EZ and the 1040 for the back taxes. For the amended year, 1040X and form 1116.

 

 

 

Okay - I expect there are reasons why you might file the 1116 INSTEAD of the 2555 - such as if you paid more in Chinese taxes than what the 2555 would give credit for.

 

Thanks for the info.

[Guest ExChinaExpat]

Here's my answer (found in your last post above):

 

The foreign tax credit is not allowed for taxes paid on earned income that is excluded under the rules described in the preceding paragraph (i.e. no double dipping)

 

So you CANNOT claim a tax credit for foreign taxes paid on income that you've "excluded" using the Foreign Earned Income Exclusion - assuming Wikipedia is correct, which I expect is the case here.

 

The link you provided points to information about the Foreign Tax Credit, NOT the Earned Income Exclusion - that's why I was curious.

 

I've had Foreign Taxes Paid reported on 1099's which WOULD go on the 1116.

 

Randy, I really cannot speak with confidence about the laws and forms associated with filing for foreign income. In fact, I prefer not to know and let the tax professionals handle it. All I can state here is what I did and why, and then what happened. I know you prefer to learn the details yourself, which I respect, as many people prefer to file their own taxes so they can know with confidence what's happening.

[Randy W]

Okay, I see now in the Form 1116 Instructions where it says

 

Do not include any earned income excluded on Form 2555, Foreign Earned Income, or Form 2555-EZ, Foreign Earned Income Exclusion.

 

 

So, in general, as I understand it, you can report your Foreign Earned Income on EITHER Form 2555, or Form 1116, but not both

Edited November 18, 2013 by Randy W (see edit history)

[Randy W]

It looks like the Form 1116 can be used to get a tax credit equal to the amount of actual taxes paid to a foreign government, for ANY foreign income.

 

Form 2555 (the Foreign Earned Income Exclusion) may be used ONLY if you satisfy the residency tests (Lines 1 and 2) for bona fide residency or physical presence in the foreign country.

 

Form 2555 gives you a tax credit, after you use the Foreign Earned Income Exclusion Worksheet in the 1040 instructions, in the amount of the American tax you would pay on that money, but beginning at the 10% bracket, instead of whatever bracket you may be in based on your U.S. income. Using the Worksheet, you figure your tax on the U.S. and foreign incomes combined, and then figure the tax on the foreign income only (this puts it in the 10% bracket right off the bat) - and then subtract the two amounts to get your actual tax