Foreign income

[manyhappyreturns]

I'm wrestling with preparing a return for a British couple who are US residents (have green cards) but have income in the US and UK (and even some from Spain & Portugal) as well. Their tax home is here in the US as of 2010 when they finished building their house here and selling their home in the UK. The interest, dividend & capital gains income is easy to figure, so no problem there. They both get pension income from the UK, and it's reported on 6-page forms that make no sense to me at all, although my client boiled it all down to his and hers income as well as his and hers foreign withholdings, but my software can't deal with no US EIN. He is a self-employed financial advisor and travels a lot to UK and Spain and Portugal, and most of his clients are in those countries rather than in US. They paid the UK equivalent of SE tax to the UK for both of them, even though the spouse didn't have any SE income. A further complication is that the UK tax year is April 1st through March 31st, and the SE taxes they paid for the UK tax year were paid in January 2012. I"m meeting them on this coming Monday, so any direction I can get before that would be greatly appreciated. Thanks. Linda

[BP.]

They both get pension income from the UK, and it's reported on 6-page forms that make no sense to me at all, although my client boiled it all down to his and hers income as well as his and hers foreign withholdings, but my software can't deal with no US EIN.

I have clients who receive UK pension. No EIN. I successfully e-file their return each year just by entering the amount right onto line 16b (using software override.)

If that helps, that's one issue to cross off that big list.

[manyhappyreturns]

Great idea. Thanks! Now I'm wondering why I didn't think of it. I'm still hoping for some input on the self-employment tax and the difference in tax years.

[joanmcq]

What software are you using? Mine has a special input form for foreign wages and pensions (ATX).

If it's National Insurance(the UK version of Social Security) they are receiving, it's treated as social security (see the US/UK tax treaty--this should be your first read when doing in-pat or ex-pat returns!). The equivalent taxes are no more deductible than FICA is for the US.

When did they get their green cards? they are taxed on worldwide income from the moment they get their green cards. If they were not residing in the US, they may qualify for the foreign earned income exclusion. Otherwise, they can take the foreign tax credit for any double taxed income. And don't forget to ask about foreign bank/investment accounts (possible FBAR & new form), as well as any foreign pensions NOT that are not SS equivalents. You might have to file the 3520/3520A for the foreign pensions.

And yeah, I just love the UK tax year.

[manyhappyreturns]

I'm using TaxWorks through TRX. I'll do some more checking for the right input screen for this. I know I can input the amount right on the 1040 as BP suggested, then include the withholdings on the ES tax payments screen, but there may be a better way that shows that it is indeed foreign source income.

This couple got their green cards in January of 2010, and became official residents in Dec 2010 when they finished building their house here. I prepared their 2010 tax return, but have my doubts that it was done totally right. I was up front with them, telling them I'd never done a return with foreign income before, and they were totally willing to file an extension and wait for me to learn it all, and also willing to take the risk that I didn't do it completely right. In my research I ran across the TD F 90-22.1, REPORT OF FOREIGN BANK AND FINANCIAL ACCOUNTS forms (I'm assuming that's what you are calling FBAR?), and we got those filled out and sent. They did not have pension income in 2010, as they both starting drawing their pensions in 2011. They took foreign tax credit in 2010 for investment withholdings only, and it was a very small amount, just over $100.

Yes, he referred to SE tax paid in the UK as National Insurance. There was no mention last year of SE tax paid in the UK, so I'm going to need to check on that, because in 2010 they were both self-employed, and the spouse's business was in the UK. And the foreign pensions they are receiving are not SS equivalents, so I'll need to check out the 3520 forms, which until right now I didn't know existed.

I'm such a newbie at this! Kinda scary. I so appreciate all the help I'm getting here. Just wish I'd have know about this forum last year!

Linda