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Lev
Lev, Tax Advisor
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Experience:  Taxes, Immigration, Labor Relations
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Hi there.. I am living in Switzerland (11 yrs.) and for 2010

Resolved Question:

Hi there.. I am living in Switzerland (11 yrs.) and for 2010 I recieved about 70% of gross in unemployment compensation... and this was taxed along with the other 30% as general income.. how do I fill out the 2555, 1116 and 1040 properly.. As i have a letter now from IRS..
Submitted: 5 years ago via Cornell Legal Info Institute.
Category: Tax
Expert:  Lev replied 5 years ago.

LEV :

Hi and welcome to Just Answer!
Your unemployment compensation is not classified as earned income for purposes foreign earned income exclusion and may not be excluded on the form 2555.
The statement that the IRS sent to you claiming that Swiss Unemployment not EARNED - is correct.
You need amend your tax return and instead of earned income exclusion - claim a foreign tax credit for taxes paid in Switzerland using the form 1116. Most likely – that will eliminate your US tax liability.

Customer:

what about line 19 of form 1040 --> should I put this unemployment comp. there as it is foreign ?

LEV :

Yes - it should be reported on the line 19 - as unemployment compensation - regardless if it was paid in the US or abroad.

Customer:

and will 1116 include the 30% earned as well as 70% unemployment or ?

LEV :

You will include into the form 1116 Part I the full amount that you report on the 1040 line 19
In Part II you will report the amount of taxes paid to Switzerland (according to your information - 30% of that amount),
and in Part III you will calculate the credit.

LEV :

That credit will go to the form 1040 line 47 and will reduce your US tax liability.

Customer:

ok.. i can see all but part II as I payed Taxes on both the earned 30% AND unemplmnt 70% togethor?

Customer:

1 last thing, if the 30% is on 2555, is that also the amount on line 7 of 1040 or cancel each other out.. thx

LEV :

If you claim earned income exclusion on the form 2555 - you may not claim a foreign tax credit on the same income. In this case you will list on the 1116 only unearned income and Switzerland taxes paid on that income only.

LEV :

On the form 1040 line 7 - you include only gross wages - gross unemployment compensation is reported on the line 19.

Customer:

so for me my 1040 line 7 and line 21 (form 2555) will cancel each other out.. sound viable?

LEV :

Yes - if the amount of foreign earned income exclusion is below the limit.

Customer:

my carryover on 1116 is 0, how can I make that bigger..?

Customer:

so PART II 1116 is ALL Taxes paid (from all sources - even unemployment), yes ?

LEV :

Foreign tax credit carryover is the amount you claimed in past years but for whatever reason was not able to use it. You may not "make that bigger" - that is coming from your past tax returns.

LEV :

In the Part II - you include only foreign taxes that are eligible for credit. Foreign taxes paid on earned income that you excluded on the form 2555 are not eligible for the credit - thus do not include them.

Customer:

unemployment is not classified as earned, correct

LEV :

that is correct.

Customer:

ok. I think i misunderstand you .. the 2555 amount (30% earned) cannot be on the 1116 then..the word excluded threw me off..

LEV :

Let consider this example - you have $50,000 foreign earned income (your wages) and $30,000 unearned income (unemployment compensation)
For earned income - $50,000 - you may completely exclude it from taxable income - so your US tax liability will not be calculated from that income - you are using form 2555 to claim the exclusion.
You may not exclude unearned income - $30,000 - so your US tax liability will be calculated for that income. However because the same income is taxed in the US and abroad - you may claim a credit for taxes paid in Switzerland - that is the purposes of form 1116.

Customer:

so had I worked all that time I would have been under the exclusion amount and my taxes would have been 0. but because I was unemployed and unearned I now have to pay a nice sum in taxes... :( wow... something seems wrong in that system..

LEV :

That doesn't mean you will have a tax liability (while that is possible) - because the same income is taxed in the US and in Switzerland - you are using the form 1116 and claim the foreign tax credit - so you effectively will avoid double taxation.

Customer:

well tax is only 10%, so US of A needs the other 23% i suppose..

LEV :

Then - you will offset only part of your US tax liability - and will have to pay a difference.

Customer:

well in that case why can't unemployment compensation be on the 2555, if it is taxed exactly the same as earned...?

LEV :

Because it may not be excluded as eached income.

Customer:

so don't be unemployed -- aye..

Customer:

:)

LEV :

For purposes of the foreign earned income exclusion - yes - unemployment compensation may not be excluded.

Customer:

still does not make sense, but I believe your information.. I payed over 8k in taxes here(incl unemployment), and normally never need to anything to USA (w/2555); this on my 85k total income. looks like now i pay another 8k to USA on same amount, just for being unemployed.. Is that fair ?

Customer:

not to mention that no one wants to be unemployed..

LEV :

Taxes are never fair... but someone has to pay... that is why we have tax laws...
Please be aware that you do not pay taxes on the same amount twice - whatever you paid on that income in Switzerland is credited against your US tax liability. Just because the tax rate in Switzerland is lower - you are liable – but only on the difference.

LEV :

The same amount is for 2009 and 2010 - $5700 for those below 65 and $7100 if you are 65 or above.
Please see for reference IRS publication 501:
2009 - http://www.irs.gov/pub/irs-prior/p501--2009.pdf - page 24
2010 - http://www.irs.gov/pub/irs-prior/p501--2010.pdf - page 23

LEV :

Sorry - please ignore last post - that was a mistake.
Let me know if you need any help. Sorry if you expected a different answer.

Lev and other Tax Specialists are ready to help you

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