Discussion:Foreign earned income w/ US spouse
From TaxAlmanac
Discussion Forum Index --> Tax Questions --> Foreign earned income w/ US spouse
| 20 May 2007 | |
| A friend of mine asked me to do her parents tax return.
Both are US citizens. The wife lives and works here in the US. The husband owns a company in a foreign country. He also works there and lives there for part of the year. However, I don't believe he meets the 330 day present test, since the wife said he's 2 weeks in the US and 2 weeks in the foreign country. Here's the problem. The wife gave me all her itemized deductions. Its more than her income. They have never reported the husband income before because of the exclusion. I don't believe they have ever filed form 2555 either. They could not provide me with a previous year's tax return. How should I handle this? Any suggestions? | |
| 20 May 2007 | |
| You said BOTH persons are US citizens. Since they both are US citizens, they both report worldwide income, including the income earned in the foreign country. They can still take the exclusion of the foreign income.
You should get a transcript from IRS of the prior years returns and see if they reported the ww income from both persons. | |
| 20 May 2007 | |
| Note that if the husband owns more than 50% of a foreign corporation, then he should be annually filing Form 5471. There is a $10,000 penalty for each year this form is not filed. If the foreign corporation is owned more than 50% by U.S. persons, then it would be a controlled foreign corporation. Certain income recognized by controlled foreign corporations is treated as being deemed distributed to the U.S. shareholders ("Subpart F Income").
If foreign taxes have been paid, then the foreign tax credit may reduce the amount of U.S. tax due. | |
| 21 May 2007 | |
| She can take the exclusion of income only if she meets the definition of "tax resident" in the foreign country under the foreign country's definition of the phrase. This is the "bona fide resident" exemption. Ditto for the husband. Sometimes one person qualifies and the other doesn't, but usually both do.
If you don't know how to do a 5471 with Subpart F, and there's no one in your company that does 5471's, I wouldn't experiment on this couple - the fines and penalties for screwing up are just too big. Even if you got a huge E&O policy, you still have the time to figure out what the heck is needed - huge - and no one to review your work. You could farm that work out to someone else and add 10 or 20% to the top for your fee to sort it out. | |
