Thank you for your question today.
I would like to ask you a couple of questions regarding the Form 1116, so that I know we've both on the same page
First, I am assuming that you are filing 2 forms 1116, one for passive income, and one for the general category income
I also want to be sure that your question is for US taxes, even though the people lived in Australia
Did the tax payers qualify for excluding their foreign income based on bonafide or physical presence test?
I will check back later today to see if my assumptions are correct or not
Yes General and Passive form 1116 with standard deduction used across both
The people (well us) earn all our income in Australia as we only lived in the US for 7 years (but became citizens whilst there since we went on a green card), had no idea we had to file taxes forever though, but it will be nice to go there on a holiday one day without a visa!
We have never owned a home in the USA and only rented houses there so we're pretty much permanently living in Australia.
As a Green Card Holder, you would need to file a US tax return, but the good news is that you should have little to no taxable into to the IRS.
Since you don't live in the US, I'm sure you can prove you are a bonafide resident of Australia
This allows you to file
and "exempt" out of paying any US tax on up to $95100 of earned income
That means that you may only claim a credit on Form 1116 for the $ amount of EARNED income that exceeds the $95100
For 2013, the $ amount of earned income you can exclude will be $97600
Please see below:
This means that for all intents and purposes, you will owe little to no tax. You would still need to file the Form 1040 with the Form 2555 attached, and unless the $ amount of your passive income is more that your standard deduction of $11950, plus your exemption of $3800 per person, you will still report the passive income. but if there's not enough to generate a US tax, you don't need to file Form 2555 for passive income UNLESS there is an actual tax due.
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ok, I'll investigate form 2555 a little more then, also I realised that as the top marginal rate in the US is 35%, but I am taxed at 37% for interest and wage income over $80,000 in Australia, then the high tax kickout rule would apply and the passive interest income would just be general income then? (I guess a good thing when you always have excess Australian tax on general income).