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Anne
Anne, Master Tax Preparer
Category: Tax
Satisfied Customers: 2365
Experience:  Enrolled Agent with 25 Years Experience specializing Individual and Small Businesses
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I have a form 1116 FTC question. Ill lay out a scenario first,

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I have a form 1116 FTC question. I'll lay out a scenario first, say family income is $90k, income taxes are pretty high at $25k and passive income may be $10k and say it's all bank interest. The 1116 general category form seems ok for this family, but because their 1040 line 44 tax is only $15k they are limited to claiming only $13.5k (9/10ths) and have excess foreign general category taxes of $11.5k... The passive category income is where they are in trouble, they have $10k income (and 1/10th of the standard deduction), but no direct foreign taxes on their interest until their end of year tax return so perhaps they have $0 as line 14 and 22 are both zero?... Then back in 1040 land line 44 with $15k tax due they have only ($13.5k general + $0k passive) at Line 47 and they have to pay the US $1.5k even though they already paid a lot more than that to the foreign country...

So at the end of their tax year they only paid maybe $200 extra tax on the end of year return as they had plenty of deductions, work expenses and the like. Doesn't that mean some of the "income tax" levied during the year on the wages was in fact passive tax on the interest. i.e. the country taxes interest at the families full marginal rate of say 35% but where is the credit for that? It's built into the entire tax year, it doesn't show up directly when you are credited the interest. You can't just assign the end of year tax return of $200 extra tax as the passive income credit as the real tax viewed separately on $10 passive income would be $3.5k in that return, but work deductions, gifts to charities etc make that mostly disappear in the final return.

Anne :

Hi Wayne

Anne :

Thank you for your question today.

Anne :

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

Anne :

First, I am assuming that you are filing 2 forms 1116, one for passive income, and one for the general category income

Anne :

I also want to be sure that your question is for US taxes, even though the people lived in Australia

Anne :

Did the tax payers qualify for excluding their foreign income based on bonafide or physical presence test?

Anne :

I will check back later today to see if my assumptions are correct or not

Customer:

Yes General and Passive form 1116 with standard deduction used across both

Customer:

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!

Customer:

We have never owned a home in the USA and only rented houses there so we're pretty much permanently living in Australia.

Anne :

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.

Anne :

Since you don't live in the US, I'm sure you can prove you are a bonafide resident of Australia

Anne :

This allows you to file


Form 2555 - Internal Revenue Service

Anne :

and "exempt" out of paying any US tax on up to $95100 of earned income

Anne :

That means that you may only claim a credit on Form 1116 for the $ amount of EARNED income that exceeds the $95100

Anne :

For 2013, the $ amount of earned income you can exclude will be $97600

Anne :

Please see below:

Anne :

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.

Anne :

 


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Customer:

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).

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