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FTC vs FEIE
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Hank Youngerman
Feb 2, 2012, 10:02:32 AM2/2/12
to
With thanks to those who have addressed this issue in the past... I
am now at the point of actually, finally preparing a 2011 return with
my foreign spouse. Somewhat educated, somewhat befuddled.
All her income is Canadian, and she meets the bona fide resident
test. Working through Turbotax, I can apparently exclude all her
Canadian earned income (she makes less than $92,000). She has almost
no unearned income. I can also deduct her mortgage interest and
property taxes. This doesn't lead to a bad outcome on my own return,
but is it the best?
When I tried to go through Turbotax and enter her FTC information,
Turbotax appeared to continue to exclude her income but give me a
dollar-for-dollar credit for what she paid to Canada. This obviously
can't be right.
Her federal and provincial income tax withheld was about 20% of her
gross pay. My only itemized deduction are state income taxes, which
exceed the standard deduction, and her itemized deductions are
property tax and mortgage interest, which likewise exceed the standard
deduction.
For simplicity, let me give some numbers, they aren't accurate, but it
will help to have an example. Assume no complicating factors like
AMT, passive activity, or other such stuff.
My gross income: 142,000
My itemized deductions: 8,200
My personal exemption: 3,800
My taxable income: 130,000
Her gross income: 60,000
Her itemized deductions: 11,200
Her personal exemption: 3,800
Her taxable income: 45,000
Her Canadian taxes withheld: 12,000
Her likely Canadian tax refund: 600
Based on this, if I use the FEIE, I calculate the tax on 175,000, and
the tax on 60,000, and my tax due is the difference. Tax on 175,000
is 37,070; tax on 60,000 is 8,154, so tax due is 28,916.
How would I calculate the tax due if I use the FTC? I'm not sure but
I think there is something buried in the FTC that might pro-rate her
itemized deductions.
Also, a separate question. Suppose she had $1,000 of Canadian
investment income. I assume that is not eligible for the FEIE. Would
we be able to take the FEIE on her earned income, and the FTC on the
$1,000? How would we calculate the amount of the FTC in that case? I
assume the same thing would apply if her income was over the FEIE
exclusion limit, that any excess over that amount.
Thanks.
--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2011) - All rights reserved. >>
<< ------------------------------------------------------- >>
am now at the point of actually, finally preparing a 2011 return with
my foreign spouse. Somewhat educated, somewhat befuddled.
All her income is Canadian, and she meets the bona fide resident
test. Working through Turbotax, I can apparently exclude all her
Canadian earned income (she makes less than $92,000). She has almost
no unearned income. I can also deduct her mortgage interest and
property taxes. This doesn't lead to a bad outcome on my own return,
but is it the best?
When I tried to go through Turbotax and enter her FTC information,
Turbotax appeared to continue to exclude her income but give me a
dollar-for-dollar credit for what she paid to Canada. This obviously
can't be right.
Her federal and provincial income tax withheld was about 20% of her
gross pay. My only itemized deduction are state income taxes, which
exceed the standard deduction, and her itemized deductions are
property tax and mortgage interest, which likewise exceed the standard
deduction.
For simplicity, let me give some numbers, they aren't accurate, but it
will help to have an example. Assume no complicating factors like
AMT, passive activity, or other such stuff.
My gross income: 142,000
My itemized deductions: 8,200
My personal exemption: 3,800
My taxable income: 130,000
Her gross income: 60,000
Her itemized deductions: 11,200
Her personal exemption: 3,800
Her taxable income: 45,000
Her Canadian taxes withheld: 12,000
Her likely Canadian tax refund: 600
Based on this, if I use the FEIE, I calculate the tax on 175,000, and
the tax on 60,000, and my tax due is the difference. Tax on 175,000
is 37,070; tax on 60,000 is 8,154, so tax due is 28,916.
How would I calculate the tax due if I use the FTC? I'm not sure but
I think there is something buried in the FTC that might pro-rate her
itemized deductions.
Also, a separate question. Suppose she had $1,000 of Canadian
investment income. I assume that is not eligible for the FEIE. Would
we be able to take the FEIE on her earned income, and the FTC on the
$1,000? How would we calculate the amount of the FTC in that case? I
assume the same thing would apply if her income was over the FEIE
exclusion limit, that any excess over that amount.
Thanks.
--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2011) - All rights reserved. >>
<< ------------------------------------------------------- >>
removep...@yahoo.com
Feb 2, 2012, 6:18:32 PM2/2/12
to
On Feb 2, 7:02 am, Hank Youngerman <dontspa...@redtopbg.com> wrote:
> When I tried to go through Turbotax and enter her FTC information,
> Turbotax appeared to continue to exclude her income but give me a
> dollar-for-dollar credit for what she paid to Canada. This obviously
> can't be right.
Agree.
> When I tried to go through Turbotax and enter her FTC information,
> Turbotax appeared to continue to exclude her income but give me a
> dollar-for-dollar credit for what she paid to Canada. This obviously
> can't be right.
> My gross income: 142,000
> My itemized deductions: 8,200
> My personal exemption: 3,800
> My taxable income: 130,000
>
> Her gross income: 60,000
> Her itemized deductions: 11,200
> Her personal exemption: 3,800
> Her taxable income: 45,000
> Her Canadian taxes withheld: 12,000
> Her likely Canadian tax refund: 600
>
> Based on this, if I use the FEIE, I calculate the tax on 175,000, and
> the tax on 60,000, and my tax due is the difference. Tax on 175,000
> is 37,070; tax on 60,000 is 8,154, so tax due is 28,916.
>
> How would I calculate the tax due if I use the FTC? I'm not sure but
> I think there is something buried in the FTC that might pro-rate her
> itemized deductions.
the tax paid to Canada, which gives you 25070. But this best case.
Use form 1116 and put in 60k of Canada income and 12k of tax. Let the
computer do the math, but I think it works like this: Your effective
tax rate with the 60k is 37070/175000=21%. The Canadian tax rate is
12k/60k=20%. Because US tax rate is more, you get credit for the full
20k. If US tax rate was 19% (say due to some more credits you decided
to take), you would only get credit for a portion of the Canadian
taxes paid -- probably 19% of 60k = 11400, with 600 carried over to
next year and beyond, although it might not be usable next year.
However, maybe form 1116 will ask you to calculate the tax rate
without the 60k, which will likely be less than 21% because less or
none of your income will be in the 33% tax bracket, and thus you won't
get the full credit. I don't know what the form does and am too lazy
to look it up. Plug it in and let me know what happens. In TaxAct
they have the actual forms where you can enter numbers, as opposed to
the wizards of TurboTax, and if you are tax geek this might be better.
> Also, a separate question. Suppose she had $1,000 of Canadian
> investment income. I assume that is not eligible for the FEIE. Would
> we be able to take the FEIE on her earned income, and the FTC on the
> $1,000? How would we calculate the amount of the FTC in that case? I
> assume the same thing would apply if her income was over the FEIE
> exclusion limit, that any excess over that amount.
of income, namely investment income of Canada (the first category if
you chose the FTC would be salary income of Canada), with income as
$1000. Calculate Canadian tax due on this amount. I don't know if
form 1116 will still ask for the total US effective rate, which above
we found to be about 21%, or whether it will ask for the US rate on
this piece of income, which may be just 15%.
Hank Youngerman
Feb 2, 2012, 8:53:30 PM2/2/12
to
On Feb 2, 6:18 pm, "removeps-gro...@yahoo.com" <removeps-
I think that it might work that way in principle, but that's not how
the form goes. (I did some work on it since my last posting.) What
it seems to do is calculate the ratio of Canadian income to total
income. If that ratio is 30% (as in this example), you cannot take a
credit for more than 30% of the tax due. However, there are some
nuances. There seem to be special rules for handling mortgage
interest and property taxes. I'm not sure, but it looks like I have
to take 100% of my wife's property taxes off her Canadian income
before computing the allowed percentage. And also, the mortgage
interest seems to be allocated between USA and foreign income whether
the property is in the USA or not.
At the moment, though, I'm coming up with tax due of $2500 less using
the FTC, which makes me happy, and doubly so because I would rather
not have to say she is a "bona fide resident of Canada" which could
come back to haunt us later in immigration. (She has her green card,
but she could lose if if she does not actually reside in the USA.
"Reside" can be a somewhat flexible term, but saying she is a bona
fide resident of Canada won't exactly help!)
Now if I can just figure out where to put the damn numbers into
TurboTax!
the form goes. (I did some work on it since my last posting.) What
it seems to do is calculate the ratio of Canadian income to total
income. If that ratio is 30% (as in this example), you cannot take a
credit for more than 30% of the tax due. However, there are some
nuances. There seem to be special rules for handling mortgage
interest and property taxes. I'm not sure, but it looks like I have
to take 100% of my wife's property taxes off her Canadian income
before computing the allowed percentage. And also, the mortgage
interest seems to be allocated between USA and foreign income whether
the property is in the USA or not.
At the moment, though, I'm coming up with tax due of $2500 less using
the FTC, which makes me happy, and doubly so because I would rather
not have to say she is a "bona fide resident of Canada" which could
come back to haunt us later in immigration. (She has her green card,
but she could lose if if she does not actually reside in the USA.
"Reside" can be a somewhat flexible term, but saying she is a bona
fide resident of Canada won't exactly help!)
Now if I can just figure out where to put the damn numbers into
TurboTax!
Hank Youngerman
Feb 7, 2012, 2:13:12 PM2/7/12
to
There are two "percentage" calculations. One is the calculation of
deductions from foreign income. If, for example, 25% of your income
is from foreign sources, then you deduct 25% of your deductions from
your foreign income. The other is the ratio of foreign "taxable"
income to total "taxable" income. I put taxable in quotes because
it's not exactly that, I think it is before personal exemptions.
The formula for the latter calculation is clearly prescribed.
However, the former requires a denominator of "total income" which is
NOT clearly defined. Turbotax seems to include salary deferrals and
maybe even some other items in the denominator, items which are not
taxable. A larger denominator leads to a lower tax, because it gives
a smaller percentage of deductions to be excluded from foreign income
before using that as the numerator in the second calculation.
Is that the right way to do it though? (I hope it is.)
removep...@yahoo.com
Feb 11, 2012, 3:27:24 PM2/11/12
to
On Feb 7, 11:13 am, Hank Youngerman <dontspa...@redtopbg.com> wrote:
> I also noticed something curious
>
> There are two "percentage" calculations. One is the calculation of
> deductions from foreign income. If, for example, 25% of your income
> is from foreign sources, then you deduct 25% of your deductions from
> your foreign income. The other is the ratio of foreign "taxable"
> income to total "taxable" income. I put taxable in quotes because
> it's not exactly that, I think it is before personal exemptions.
Yep, I can see that on form 1116. I'm not too familiar with this
> I also noticed something curious
>
> There are two "percentage" calculations. One is the calculation of
> deductions from foreign income. If, for example, 25% of your income
> is from foreign sources, then you deduct 25% of your deductions from
> your foreign income. The other is the ratio of foreign "taxable"
> income to total "taxable" income. I put taxable in quotes because
> it's not exactly that, I think it is before personal exemptions.
form. Regarding your question below, I don't know. What line number
are you talking about?
> The formula for the latter calculation is clearly prescribed.
> However, the former requires a denominator of "total income" which is
> NOT clearly defined. Turbotax seems to include salary deferrals and
> maybe even some other items in the denominator, items which are not
> taxable. A larger denominator leads to a lower tax, because it gives
> a smaller percentage of deductions to be excluded from foreign income
> before using that as the numerator in the second calculation.
in total income -- you mean muni bond interest?
Hank Youngerman
Feb 12, 2012, 10:46:18 PM2/12/12
to
On Feb 11, 3:27 pm, "removeps-gro...@yahoo.com" <removeps-
"total income" is - pretty weirdly - Schedule E gross rents, with no
deductions of any kind, and Schedule C gross income, with no
deductions either. (I think you actually deduct cost of goods sold,
but that doesn't apply to me since I am selling services, not goods.)
Turbotax also does some other things that I think are weird. You have
to allocate deductions (which I think are not exclusively Schedule A
deductions, but also adjustments to income). Some are automatically
assumed to be pro-rated between domestic and foreign income,
specifically real estate taxes, medical expenses, and sales taxes.
Mortgage interest is subject to a separate allocation which is roughly
done in proportion to income. But Turbotax lumps state income taxes
into the bucket with sales taxes, and it took my self-employment tax
and self-employed 401(k) contributions and put them in the category of
"Not definitely allocatable" to USA or foreign income - I think those
are pretty clearly related to USA income, since they are my income (as
opposed to my wife's) and I only work in the USA.
That part about including gross rent and gross self-employed income
before expenses kind of blew me away. (And the calculation works in
my favor.) My gross rent on Schedule E was $12,450 and net income was
$282.
gro...@yahoo.com> wrote:
> On Feb 7, 11:13 am, Hank Youngerman <dontspa...@redtopbg.com> wrote:
>
> > I also noticed something curious
>
> > There are two "percentage" calculations. One is the calculation of
> > deductions from foreign income. If, for example, 25% of your income
> > is from foreign sources, then you deduct 25% of your deductions from
> > your foreign income. The other is the ratio of foreign "taxable"
> > income to total "taxable" income. I put taxable in quotes because
> > it's not exactly that, I think it is before personal exemptions.
>
> Yep, I can see that on form 1116. I'm not too familiar with this
> form. Regarding your question below, I don't know. What line number
> are you talking about?
>
> > The formula for the latter calculation is clearly prescribed.
> > However, the former requires a denominator of "total income" which is
> > NOT clearly defined. Turbotax seems to include salary deferrals and
> > maybe even some other items in the denominator, items which are not
> > taxable. A larger denominator leads to a lower tax, because it gives
> > a smaller percentage of deductions to be excluded from foreign income
> > before using that as the numerator in the second calculation.
>
> Do salary deferrals apply in your case? What other items are included
> in total income -- you mean muni bond interest?
I was able to dig a little deeper into Turbotax. What it includes in
> On Feb 7, 11:13 am, Hank Youngerman <dontspa...@redtopbg.com> wrote:
>
> > I also noticed something curious
>
> > There are two "percentage" calculations. One is the calculation of
> > deductions from foreign income. If, for example, 25% of your income
> > is from foreign sources, then you deduct 25% of your deductions from
> > your foreign income. The other is the ratio of foreign "taxable"
> > income to total "taxable" income. I put taxable in quotes because
> > it's not exactly that, I think it is before personal exemptions.
>
> Yep, I can see that on form 1116. I'm not too familiar with this
> form. Regarding your question below, I don't know. What line number
> are you talking about?
>
> > The formula for the latter calculation is clearly prescribed.
> > However, the former requires a denominator of "total income" which is
> > NOT clearly defined. Turbotax seems to include salary deferrals and
> > maybe even some other items in the denominator, items which are not
> > taxable. A larger denominator leads to a lower tax, because it gives
> > a smaller percentage of deductions to be excluded from foreign income
> > before using that as the numerator in the second calculation.
>
> Do salary deferrals apply in your case? What other items are included
> in total income -- you mean muni bond interest?
"total income" is - pretty weirdly - Schedule E gross rents, with no
deductions of any kind, and Schedule C gross income, with no
deductions either. (I think you actually deduct cost of goods sold,
but that doesn't apply to me since I am selling services, not goods.)
Turbotax also does some other things that I think are weird. You have
to allocate deductions (which I think are not exclusively Schedule A
deductions, but also adjustments to income). Some are automatically
assumed to be pro-rated between domestic and foreign income,
specifically real estate taxes, medical expenses, and sales taxes.
Mortgage interest is subject to a separate allocation which is roughly
done in proportion to income. But Turbotax lumps state income taxes
into the bucket with sales taxes, and it took my self-employment tax
and self-employed 401(k) contributions and put them in the category of
"Not definitely allocatable" to USA or foreign income - I think those
are pretty clearly related to USA income, since they are my income (as
opposed to my wife's) and I only work in the USA.
That part about including gross rent and gross self-employed income
before expenses kind of blew me away. (And the calculation works in
my favor.) My gross rent on Schedule E was $12,450 and net income was
$282.
removep...@yahoo.com
Feb 12, 2012, 11:30:04 PM2/12/12
to
On Feb 12, 7:46 pm, Hank Youngerman <dontspa...@redtopbg.com> wrote:
> > Do salary deferrals apply in your case? What other items are included
> > in total income -- you mean muni bond interest?
>
> I was able to dig a little deeper into Turbotax. What it includes in
> "total income" is - pretty weirdly - Schedule E gross rents, with no
> deductions of any kind, and Schedule C gross income, with no
> deductions either. (I think you actually deduct cost of goods sold,
> but that doesn't apply to me since I am selling services, not goods.)
>
> Turbotax also does some other things that I think are weird. You have
> to allocate deductions (which I think are not exclusively Schedule A
> deductions, but also adjustments to income). Some are automatically
> assumed to be pro-rated between domestic and foreign income,
> specifically real estate taxes, medical expenses, and sales taxes.
> Mortgage interest is subject to a separate allocation which is roughly
> done in proportion to income. But Turbotax lumps state income taxes
> into the bucket with sales taxes, and it took my self-employment tax
> and self-employed 401(k) contributions and put them in the category of
> "Not definitely allocatable" to USA or foreign income - I think those
> are pretty clearly related to USA income, since they are my income (as
> opposed to my wife's) and I only work in the USA.
It might be a good idea to do the steps with another tax program to
> > Do salary deferrals apply in your case? What other items are included
> > in total income -- you mean muni bond interest?
>
> I was able to dig a little deeper into Turbotax. What it includes in
> "total income" is - pretty weirdly - Schedule E gross rents, with no
> deductions of any kind, and Schedule C gross income, with no
> deductions either. (I think you actually deduct cost of goods sold,
> but that doesn't apply to me since I am selling services, not goods.)
>
> Turbotax also does some other things that I think are weird. You have
> to allocate deductions (which I think are not exclusively Schedule A
> deductions, but also adjustments to income). Some are automatically
> assumed to be pro-rated between domestic and foreign income,
> specifically real estate taxes, medical expenses, and sales taxes.
> Mortgage interest is subject to a separate allocation which is roughly
> done in proportion to income. But Turbotax lumps state income taxes
> into the bucket with sales taxes, and it took my self-employment tax
> and self-employed 401(k) contributions and put them in the category of
> "Not definitely allocatable" to USA or foreign income - I think those
> are pretty clearly related to USA income, since they are my income (as
> opposed to my wife's) and I only work in the USA.
see if it comes up different. The pro-ration thing looks strange to
me.
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