# The IRS forces me to submit an invalid return



## FFMralph

There is no way I can complete my return the correct way.

I have elected to file *married filing separately*. My German return is *married filing jointly*. My NRA spouse has no earned income but we receive large tax breaks due to her permanent disability.

On my US return, I list the withheld foreign tax shown on my German wage and tax statement. This is more than what is actualy paid. This is due to my spouses tax breaks.

How am I to find the amount actualy paid from me?


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## FFMralph

Sorry, what I am trying to say is, there is no way to determine what part of my Joint foreign taxes belong to my spouse and which belong to me. Either the IRS gets screwed or I get screwed. There is no fair way other than to elect to make a Joint return. This would require me to claim my NRA spouses pensions and disability payments.


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## Bevdeforges

Use your pay slip as it is and just go for the FEIE on your earnings. Or, if you really want to go the Foreign Tax Credit route, claim the taxes withheld on your pay card. Period. Your spouse's pensions and disability payments belong to her, and if you get back money from the Steueramt because of these, then logically, that money "belongs" to her, too. (And is none of the IRS' business.)

Keep it simple. The IRS really isn't going to look that closely at a foreign return where things are handled in a logical and rational manner. 
Cheers,
Bev


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## FFMralph

Thanks again Bev. That is the way I am doing it. I take the FEIE but that does not cover my combined earnings (general and passive) so the FTC is used for the remaining amounts. I report the foreign tax amount shown on my slip. It is however, not correct. But there is no way of doing it correctly other than a joint return. 

Combing tax information from two (or more) countries isn't always going to work. 

I sure hope that you are right and that the IRS never decides to question our returns.


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## Bevdeforges

The FEIE isn't applicable to any passive income - actually, it's not applicable to anything other than "earned" income (i.e. salary type income). I think you might have difficulty using your income tax withholding amounts from your Steuerkarte to offset any US tax assessed on your passive income.
Cheers,
Bev


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## BBCWatcher

The IRS has an answer for this situation. It's on Page 6 of Publication 514. I'll quote it here for convenience:

_*Combined income*. If foreign tax is imposed on the combined income of two or more persons (for example, spouses), the tax is allocated among, and considered paid by, these persons on a pro rata basis in proportion to each person's portion of the combined income, as determined under foreign law and Regulations section 1.901-2(f)(3)(iii). Combined income with respect to each foreign tax that is imposed on a combined basis (and combined income subject to tax exemption or preferential tax rates) is computed separately, and the tax on that combined income is allocated separately.

These rules apply to foreign taxes paid or accrued in tax years beginning after February 14, 2012. However, you can choose to apply the new rules to foreign taxes paid or accrued in tax years beginning after December 31, 2010, and before February 15, 2012. For more details, see paragraphs (f) and (h) of Regulations section 1.901-2. For similar rules applicable to prior tax years, see Regulations section 1.901-2 (revised as of April 1, 2011).

*Example*. You and your spouse reside in Country X, which imposes income tax on your combined incomes. Both of you use the “u” as your functional currency. Country X apportions tax based on income. You had income of 30,000u and your spouse had income of 20,000u. Your filing status on your U.S. income tax return is married filing separately. You can claim only 60% (30,000u/50,000u) of the foreign taxes imposed on your income on your U.S income tax return. Your spouse can claim only 40% (20,000u/50,000u)._

You can also dig into the specific regulations cited in the instructions if you wish. I did, briefly, and I didn't see anything that would materially amplify Publication 514's guidance.

So there's your answer. It's not Bev's answer, as it happens. It would appear in your case that your pro rata share -- since your wife has zero income (from all sources) -- is 100%. That is, your foreign tax is equal to the total net foreign tax paid on your joint return in Germany, inclusive of the German tax breaks. That may not be the answer you like, but that's what the IRS says.


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## FFMralph

I'm afraid you're right BBCWatcher. It seems as though my wifes german tax breaks are going to force me into paying US tax. It won't be long before I am going to have to file jointly.

Thanks Bev, thanks BBCWatcher.


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## BBCWatcher

It's quite possible it'd be advantageous (on a household basis) for your non-resident alien spouse to make a Section 6013(g) election and agree to file a joint U.S. tax return with you. You could run a simulation to see if that makes sense.

Bear in mind that Section 6013(g) is a once per lifetime (or at least per marriage, which is hopefully the same thing) election. If you stop filing jointly after making the election you cannot go back to a joint return unless your NRA spouse becomes a U.S. resident.

MFJ could potentially open up the Earned Income Tax Credit for your spouse if she is receiving certain types of disability income. It's a fairly narrow path for a NRA spouse to qualify for the EITC, but it's possible. (The EITC instructions/documentation say that NRA spouses are in some cases eligible.) The EITC is quite interesting because it's a refundable tax credit, meaning you could do better than zero conceivably.

If your disabled spouse is incurring significant medical expenses (measured on a household basis) that can be helpful if you itemize on a joint return. (Significant medical expenses ordinarily tend to lead to separate returns, to allow the spouse with those significant expenses to qualify for the tax benefits more easily. But she doesn't have to file, so in this case a joint return might capture those benefits if those medical expenses are truly significant in household terms. Significant means greater than 7% of household income, as I recall.)

You might qualify for the Dependent Care Tax Credit with a joint return, so take a look at that as well. The DCTC might also be a refundable tax credit like the EITC, though I'm less sure about that.

With a joint return your spouse becomes subject to FATCA, though those thresholds are quite high. She does not, however, become subject to FBAR since that's a separate filing requirement that she does not legally have, even with a Section 6013(g) election.

Hope all that helps.


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## Bevdeforges

FFMralph said:


> Thanks again Bev. That is the way I am doing it. I take the FEIE but that does not cover my combined earnings (general and passive) so the FTC is used for the remaining amounts. I report the foreign tax amount shown on my slip. It is however, not correct. But there is no way of doing it correctly other than a joint return.
> 
> Combing tax information from two (or more) countries isn't always going to work.
> 
> I sure hope that you are right and that the IRS never decides to question our returns.


Just a thought, though.... are any of those passive earnings coming from jointly held accounts? You may be justified in declaring only half of those earnings as "your" income. 

To be dead honest, the IRS doesn't subject overseas earnings to the type of scrutiny they do earnings reported from US banks on 1099s. That may change to some degree with this FATCA stuff, but the bilateral agreements I have read so far still are using 2014 as the start date for FFI (Foreign Financial Institution) reporting to the IRS. 

I know the tax assessment we get here in France details quite extensively how much tax each element of your declaration generates - and if I had to, I would use that rather than the IRS apportionment method BBCWatcher cited. The thing you want to do is to have a justifiable reason for any "nonstandard" stance you take. But oddly enough, US tax rules are not written in stone, so that if you can show clear and logical reasons for what you're doing, it will very often fly.
Cheers,
Bev


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## BBCWatcher

Why wouldn't one follow the IRS's instructions? They're perfectly clear, and it's their tax return you're filling out.


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## BBCWatcher

Don't forget to check the tax treaty, by the way. There is one between the U.S. and Germany. Potentially there's something in there that might be useful. Let me see if I can find it....

Yes, here it is. At quick glance it doesn't look obviously helpful, but it's probably worth a bit of study.


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## FFMralph

Thanks for the tip. I#ll check into the possible bennefits of filing jointly.


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## FFMralph

Found more info in Publ 514 under the Topic "*Foreign Tax Redetermination*". 
Basicly it states:
1. You are required to file Form 1040X and a new Form 1116 if any or all foreign taxes are refunded.
2. The penalty for not filing is 5%/month of the tax due. Max. 25%.

So. If you still don't owe, why bother?


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## Bevdeforges

FFMralph said:


> So. If you still don't owe, why bother?


Exactly.
Cheers,
Bev


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## BBCWatcher

Well, one reason is if you take the FTC and apply excess FTCs to past or future year tax returns. If that original foreign tax was refunded partly or completely, then your excess FTCs are different (lower), too.

Another reason: refundable tax credits which might have to get reduced.

But I think you're misinterpreting that. Foreign taxes are strictly on a cash flow basis, as I understand it. If you get a foreign tax refund in a different calendar year, then that just lowers the foreign taxes you pay in that same year. Assuming all foreign taxes are reported net, and they're above zero, and you report those cash flows year by year, everything should be fine. If your foreign tax goes negative, EITC-style (or in the last year you live some place), then that might be a different story. Someone can correct me on that if I'm mistaken, but I'm pretty sure that's how it works.


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## FFMralph

True. The FTC's are then lower (higher if you have to pay more) . But if you don't report the tax redetermination, then the IRS has no way of knowing about the adjustments. 
There is no fine as long as no US tax is due. 

The whole point is: "Whovever files Form 1116 is screwed". I think it is safe to say, most countries tax year ends on the last calendar day. A lot of the tax filers get a refund or have to pay additional taxes. Regardless, the processing will take longer than the deadline for US expat tax reporting. So......Form 1116 filers are required to file an amendment.


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## BBCWatcher

Why would an amended 1116 be required if you're reporting net foreign taxes (inclusive of refunds) for each calendar year, assuming the net tax is always positive? I'm pretty sure you just go by cash flows and don't worry about whether the foreign government is issuing the refund check in year X+1 for overpaid taxes in year X. You just lump that refund into X+1 cash flow.

Am I missing something? I don't think the IRS tries to second guess the foreign tax system that way.


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## FFMralph

I don't think so. 
Coinfusing though. Publ 514 under the Topic "Foreign Tax Redetermination" 
*You are required to notify the IRS about a foreign tax credit redetermination that affects your U.S. tax liability for each tax year affected by the redetermination*. In most cases, you must file Form 1040X, Amended U.S. Individual Income Tax Return, with a revised Form 1116 and a statement that contains information sufficient for the IRS to redetermine your U.S. tax liability *for the year or years affected*.


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## BBCWatcher

OK, but note the section on cash accounting. Also, "redetermination" does not mean a simple refund or tax credit as I read it. A redetermination is, for example, a foreign tax audit that results in an additional or reduced levy -- something that wasn't predictable, basically. For example, if a foreign country's court ruled a tax illegal a couple years after it was collected, ordering the tax authority to refund it, that'd be a redetermination.


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## Bevdeforges

FFMralph said:


> I think it is safe to say, most countries tax year ends on the last calendar day. A lot of the tax filers get a refund or have to pay additional taxes. Regardless, the processing will take longer than the deadline for US expat tax reporting. So......Form 1116 filers are required to file an amendment.


Not really - the UK and Australia are two big countries with non-calendar tax years - and plenty of US expats, both in general and amongst our forum members. 

Then you also have the issue of some countries (like France) where you don't make any kind of tax payments during the tax year in progress. If you want to rely on the FTC in France, you pay full freight on your US taxes your first year in country, and have to wait until late the following year before you get your tax bill and begin to pay the actual tax due. (It's too complicated to explain much more than that - but basically, you're paying your French taxes almost two years after the fact.)
Cheers,
Bev


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## BBCWatcher

Yes, Bev is on the same page I am which is that you just use cash accounting.

There are fancier options for accrual accounting, but I'm not so smart.


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