Part Year USA Income

[Harvey Lucas]

My client, "the wife", has file HofH for last several years claiming her young daughter as qualifying dependent.

She is married, but her husband lived in Japan and he never came to visit her during that time.

This was the case for at least 2007 and 2006, the years that I prepared.

However, for 2008, her husband came to work in the USA.

She lives in Nevada. She has a 2008 W2 form $10,000.

He first came in April 2008 and worked in Mississippi for a few months, and then worked in Texas for a few months.

He visited her at least 3 times in 2008 so she can no longer file HofH.

He has two W2 forms, one from Mississippi $25,000, and one from Texas $20,000..

Both forms indicate income taxable wages Box 1, and Income tax witheld Box 2.

However, both forms have no entries for SS wages or MC wages?

Both forms are prepared by a professional payroll company.

His wife says no SS and MC taxes because he is working for a Japanese company in the USA under a special tax arrangement.

He also has some earnings in Japan, while he worked and lived in Japan for Jan-March of 2008.

I am not sure which direction to go on this one?

Possibly a MFJ 1040? If so, do I need his Japan earnings?

Or MFS for wife, and MFS for husband. If so, do I still need his Japan earnings?

Thank You

Harvey Lucas

[Koss]

Hmmm....

You wrote:

He first came in April 2008 and worked in Mississippi for a few months, and then worked in Texas for a few months.

He visited her at least 3 times in 2008 so she can no longer file HofH.

How did you come to the conclusion that she no longer qualifies for HoH?

Did he "visit her" during the last six months of the year, and if so, did he stay overnight?

You wrote:

He also has some earnings in Japan, while he worked and lived in Japan for Jan-March of 2008.

I am not sure which direction to go on this one?

Possibly a MFJ 1040? If so, do I need his Japan earnings?

Or MFS for wife, and MFS for husband. If so, do I still need his Japan earnings?

No matter how you do this, you have to report the income he earned while in Japan. US citizens and resident aliens are taxed on their worldwide income; all income is taxable unless specifically exempted by law.

However, he may well qualify for the Foreign Earned Income Exclusion (Form 2555).

You may want to try it both ways. Or all three ways...

'Cause claiming the Foreign Earned Income Exclusion might conflict with or somehow void the "special arrangement" that exempts his income from FICA. You probably need to take a close look at that. I'm sure it's legit, but I don't know whether it's a tax treaty or some sort of reciprocity agreement between our social security system and the retirement system in Japan...

Have fun with this one... :-)

BMK

[Koss]

Other Variables

How many qualifying children does this couple have?

I'm assuming they have at least one, since she filed HoH in previous years.

As you evaluate MFS vs. MFJ, you may want to look at what happens if you put one or more children on his return.

'Cause if she claimed all the kids last year, and he claims them this year, he'll get RRC and she won't have to pay it back.

But it could get even better...

You really ought to look at the dates that he visited her, and the facts and circumstances of the visit. As I noted in my first post, if they did not live together at all during the last six months of 2008, then she may still qualify for Head of Household.

And if she does...

They might be able to use Form 8332.

Going that route, she'll get EIC, and he'll get the exemptions, the child tax credit, and the RRC.

Someone is going to object to this idea by asserting that even in 2006 and 2007, she should not have used HoH, because they're not really separated, and even if he didn't live with her at all during the year, this could be construed as a temporary absence.

This same issue probably comes up a lot with guys who are deployed in the military. Military deployment is definitely a temporary absence, even if the guy was in Iraq from April through December of 2008.

But what if the guy's wife moves out of the apartment that was the marital home, and moves back in with her parents, taking the children with her? And starts talking about filing for divorce? At what point can it be said that this couple has separated?

What if they actually own a home together, and she doesn't move out? But he's in Iraq for the last seven months of the year. And in August she starts seeing some other guy... and then in December she retains an attorney, and files for divorce in January, 2009.

Would everyone agree that this couple is "married but living apart," and that because they did not live in the same household during the last six months of 2008, she can use Head of Household?

Does it make a difference if he actually returns from his deployment in January, 2009, and spends a few weeks living in the same house with her, even though she has filed for divorce? Does this somehow demonstrate that his deployment was only a temporary absence?

In your case, Harvey, what are the facts and circumstances? Are they trying to preserve the marital relationship?

That sounds like an awfully invasive question for a tax client, but I think sometimes it has to be asked...

You're definitely in a gray area.

BMK

[Koss]

Harvey--

You know what's kinda funny...

This whole discussion about what qualifies as a temporary absence is remarkably similar to a question you posted a month ago or so, about a parent claiming EIC for a kid who is "away at college."

It boils down to the same, highly subjective, highly fact-bound question: Is there an intent to return?

BMK

[Harvey Lucas]

Great Points

Thank you Koss for your input on this.

He visited and stayed over night in last 6 months of 08, so HofH is out for her.

They have only one child.

He did not visit at all in 06 or 07 so HofH for her is ok in those years.

I am thinking MFS for both of them, she will of course lose HofH and EIC, but it is what it is.

MFS also for him, possibly a 2555 to exclude his Japan Income. I am not looking forward to that can of worms though.

I am waitng to hear from his payroll office to hear the reason why his w2 is exempt from SS and MC tax.

They intend to move in together in 09, just bought a house together.

Thanks again Koss.

Harvey Lucas