Discussion Archives:First Foreign Client

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Discussion Forum Index --> Advanced Tax Questions --> First Foreign Client


Discussion Forum Index --> Tax Questions --> First Foreign Client

JasmineCPA (talk|edits) said:

7 June 2010
I am in the midst of completing our first VISA resident return (H1B) and am having trouble gaining guidance from CPAs in my area. No one seems to have prepared one. Hoping I can gain approval here (revisited from a month ago).

TP has one w-2 from the US - $32,924 2 W-2s from Portugal - $67,113 and $16,139 1 Portugese Rental - ($1,124) did you know deprecaition is 40 years? AND is a FTHB!

US wage I'm fine with obviously. TP has an aggregate amount of withholding in Portugal of $18,392.

What I have done is shown the worldwide income on loine 7 of I have the form 1116 showing $82,128 of gross income from other sources (83,252 in comp and a rental loss of $1,124)

WIth FT paid in US dollars on Part II (r) of $18,392. TP is limited to $11,081 on page 2, Line 47. CLient is also getting the dependent care credit ad make working pay credit. Finally, has some moving expenses and that's the entire return.

I realize it's a ton to ask, but if I could get an idea if I'm on the right track, I'd be forever grateful.

I know I need a signed statement saying that the clients elect to be treated as US residents for 2009. Arrived her in October of 2009 and we've extended the return until now to obtain the SPT.

We, _____________, elect to be treated as residents of the United States of America for income tax purposes under theinternal revenue code § 7701 . As residents in the United States of American since October 9, 2009 and extending our 2009 federal individual income return until ______________________, we meet the substantial presence test requirements under the Internal Revenue Code § 7701.


Again, I thank you.

NoVATaxes (talk|edits) said:

8 June 2010
I'm curious, why are the clients choosing to be taxed as residents for the entire 2009 year as opposed to filing a dual-status return?

Marcilio (talk|edits) said:

8 June 2010
First of all, ready the Portugal-USA tax treaty. Find it by going to [www.IRS.gov]. In the search box, type "portugal tax treaty". It pops right up.

R2 (talk|edits) said:

8 June 2010
I believe that Jasmine is asking whether she is on the right track by fiiing a first year alien's election.

Todundsteuer (talk|edits) said:

8 June 2010
The Dual resident TP's decision to make the whole-year resident election will require some comparative analysis.

When performing that comparison do not forget that if the TP elects whole-year residency, his/her foreign earned income may be eligible for complete exclusion under IRC §911 (Form 2555 is a whole lot easier to deal with than Form 1116). This may be true even if the maximum §911 limit is reduced by US residence and/or after 9 Oct.

If the P rental and other foreign source investment income pre-arrival in the USA were substantial and not subject to P taxation for which a credit can be obtained, that fact might weigh against making the whole-year election.

Also, don't forget to ask the TP if he will be filing a P tax return and whether he expects to receive a refund of what he paid in P taxes through withholding. This, too, may affect the decision whether to go with §911 or §902 or make the whole-year election.

CrowJD (talk|edits) said:

8 June 2010
Make sure to look at their passport. I had a smart alleck with airs trying to pass off as French. He was a cosmetic wholesaler looking for a bump in sales. Turned out he was from Calhoun, Ga. Somebody with a thin mustashe does not mean he's French.

You might try putting a little Port wine behind your ears, and see if he can tell you what vintage it is.

JasmineCPA (talk|edits) said:

8 June 2010
Easy to skip over in my original post, but the election is quite simple. TPs are firtst time homebuyers. It's a difference of receiving close to $9.5k back vs $1.5 electing dual citizen.

1040 is the way to go, I was just concerned with the 1116.

JasmineCPA (talk|edits) said:

8 June 2010
Easy to skip over in my original post, but the election is quite simple. TPs are firtst time homebuyers. It's a difference of receiving close to $9.5k back vs $1.5 electing dual citizen.

1040 is the way to go, I was just concerned with the 1116.

JasmineCPA (talk|edits) said:

8 June 2010
I believe the 2555 is NA . I am just praying the 1116 showing an $18k credi5t for FT paid (which is limited to $11k) is accurate.

I do appreciate the insight.

JasmineCPA (talk|edits) said:

8 June 2010
My only other question is state wages. Living in Ohio now, Do I code his rental and his portugese income to the federal 1040 only? It would make sense to me that it should be coded as both and his wordwide income coded to Ohio as well, I just want to make sure because there is substantial tax due. Not enough to offset the $9,000back from the feds and elect the §911

R2 (talk|edits) said:

8 June 2010
Jasmine, I am confused. Ordinarily, an alien who makes a first-year alien's election will not report income received prior to the first day of his residency period. Thus, in most cases, the foreign tax credit would not apply.

Guya (talk|edits) said:

8 June 2010
I am confused. One taxpayer is making the 7701(b), I get that but where is the 6013(g)?

Other questions: Is the Portugal property a QBU? Any FBARs? Any 3520s for investments or pensions in Portugal?

JasmineCPA (talk|edits) said:

9 June 2010
R2 - thanks for your response. I was under the impression that in order for my client to claim th FTHB, he had to be a resident alien, thus report all of his worldwide income on Line 7 of the 1040 (wages). Then, the Tp would receive a credit on the 1116 for the f.taxes paid.

Is this inaccurate? I thought the 2555 was n/a in his case, as is the 1040NR.

Your guidance is appreciated.

NoVATaxes (talk|edits) said:

9 June 2010
My understanding is, the taxpayer can make a 7701(b)(4) first-year election and be treated as a resident alien for PART of the year, starting on the first date in the election year for which the substantial presence test is met (in this instance). If the taxpayer is married, he can then make a further election under 6013(h) for both to be taxed as resident aliens for the entire year.

I think the question then becomes, for the purpose of the FTHB, if the purchase occurs within the period of US residency, is the 6013(h) election required? If not, then you can file a dual-status return (1040 with a pro-forma 1040NR attached, if applicable) and ignore all the foreign earned income during the period of non-residency.

JasmineCPA (talk|edits) said:

9 June 2010
Interesting.

They moved her 10/09, purchased in 12/09, SPT met June 5 -

The way I've prepared it is overly conservative or incorrect?

I am reporting all of their income. You are thinking I can take out the Portugese income and report in on the NR, I presume.

JasmineCPA (talk|edits) said:

9 June 2010
Only from my readings and understanding. In no way am I an expert (nor claim to be), but this are my thoughts:

If the client CHOOSES to be treated as a resident alien for ALL of 2009, then ALL world-wide income is subject to U.S. income taxes. The credit allowed under the Form 1116 effectively offsets any double taxation.

Are you refering to the Foreign Earned Income Exclusion (Form 2555), which CAN apply in some cases, but NOT in this case, because, to claim the Foreign Earned Income Exclusion, the taxpayer must be resident at BOTH the beginning and the end of the one-year exclusion period. My Portugese client does not meet that condition.

As for the state return, he is taxed ONLY for the income earned while living in Ohio, as he is considered a part-year resident under state tax law. The First Year Choice process does NOT apply under state tax law.

NoVATaxes (talk|edits) said:

9 June 2010
I am reporting all of their income. You are thinking I can take out the Portugese income and report in on the NR, I presume.

The only income reported on the NR would be US source income or foreign source income effectively connected with a trade or business in the US during the period of non-residency. If the Portugese income was not effectively connected with the US, you'd just leave it off altogether.

By the way, another complexity for a dual-status return is you cannot file a joint 1040. They would have to file MFS and lose the dependent care credit, which may be worse than making the 6013(h)election. Soooo, we might be coming right back to your original plan and do the 1116.

R2 (talk|edits) said:

9 June 2010
Jasmine, if you are clsiming the FTHB credit, you will need to make 2 elections:

1. The First Year Alien's Election under Sec. 7701(b)(4).

2. The Sec. 6013(h) joint return election.

JasmineCPA (talk|edits) said:

10 June 2010
R2 - yes. And I believe that what I have done is therefore correct. I am including all the worldwide income, filing form 1116 having the client sign a: We, _____________, elect to be treated as residents of the United States of America for income tax purposes under theinternal revenue code § 7701 . As residents in the United States of American since October 9, 2009 and extending our 2009 federal individual income return until ______________________, we meet the substantial presence test requirements under the Internal Revenue Code § 7701.

and filing a joint tax return.

I am hoping you concur.

TP is receiving $9k back which is more than we expected. I do not want to leave money on the table, but if this is correct, I'd lke to file.

JasmineCPA (talk|edits) said:

10 June 2010
My only question is - do you think I 'need' to or will it help prevent future correspondence if I include my copies of my clients' visas, passports?

CrowJD (talk|edits) said:

10 June 2010
This gets back to my post about checking their Visa and Passport. How do they look? Make sure you haven't got sucked in by the wrong crowd.

Are they wearing dark sunglasses? Do they speak one language and claim to be from somewhere else?

Get a 100 watt bulb and hold the Visa up to the light.

Hold a silver cross up to them and see if they curl up. While you are doing this, wear garlic around your neck and keep a wooden stake handy. These people could be from Translyvania.

(Come up behind them and yell "Boo"! If they don't move, they're likely vampires). Good luck.

P.S. Whatever you do, don't let them catch you napping in the office. You could lose a quart of blood that way.

R2 (talk|edits) said:

11 June 2010
Jasmine, here are some additional thoughts.

1. Are we certain that a dual status alien cannot claim the FTHB credit?

2. The clients should qualify for the Form 2555 exclusion under the physical presence test.

3. Your sample election does not satisfy the requirements for a 6013(h) election.

JasmineCPA (talk|edits) said:

11 June 2010
R2

1 - yes 2- I'm ok without the exclusion - I know this way they can claim the FTHB credit 3- worries me. Unsure what you mean. Is it my letter? Can you please help me revise?

JasmineCPA (talk|edits) said:

11 June 2010
Do I change my letter to state the wife and sone are claiming the 6013 election?

JasmineCPA (talk|edits) said:

11 June 2010
6013(g) election needs to be signed and made by BOTH spouses on top of the signed 7701(b)(4) election so I need to re-word?

R2 (talk|edits) said:

11 June 2010
In this instance, since both taxpayers are making a 7701(b)(4) election, you cannot make a 6013(g) election. Instead, you must make a 6013(h) election. See below for sample.


Taxpayer and spouse were both nonresident aliens at the beginning of the tax year and resident aliens at the end of the tax year.

Pursuant to Internal Revenue Code § 6013(h), the taxpayers hereby elect to file a joint return for the tax year ended December 31, 2009.

X________________ x__________________________

   Joe Taxpayer         	               Mary Taxpayer

Guya (talk|edits) said:

11 June 2010
Don't forget that the FBAR must be received by 30 June.

JasmineCPA (talk|edits) said:

13 June 2010
R@ - Clear now. It's unfortunate that so many professionals (at least in my area) are uninformed when it comes t this area. I have exhausted many resources and am sincerely grateful for your help.


Guya - Not applicable, but a good reminder to anyone that searches this topic.

It doesn't have to be received completly accurate either, if the information isn't readily available...but, there is no extention of time.

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