1040 , FOREIGN EARNED INCOME

[HOPE2]

Hi to all, client has foreign earned income and a w-2 also should paper file for a reason ( also, has not been 330 days abroad,  so no exclusions) I entered it on 1040 worksheet line 1 but when I make paper file, I have just 1040 page one and two.

for line 1h :   Other earned income (see instructions) I have that numbers and do not have any form that indicates this numbers for foreign earned income and in front of see instruction I do not have any explanation.

Is it ok to send client, just two pages of 1040 and for 8948 for IRS?

client is resident of Massachusetts, and should give it to him paper as well, does Massachusetts need any form like 8948 and should attach 1040 to for?

Thanks in advance.

[itonewbie]

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@HOPE2 wrote:

Hi to all, client has foreign earned income and a w-2 also should paper file for a reason

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Individuals with compensation paid by an overseas employer and not reported on a W-2 are eligible for e-filing.  You will not be able to use that as the reason for filing on paper.

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also, has not been 330 days abroad,  so no exclusions

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If your client will meet the PPT in time and satisfy all the other requirements for claiming FEIE, you should extend the return.  If all the other requirements are met, except for PPT, your client could still qualify for FEIE by meeting the BFR test although that will mean extending the 2023 return until after the end of this year.  Of course, FTC without FEIE could be more tax efficient if your client is in a high-tax jurisdiction.

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Is it ok to send client, just two pages of 1040 and for 8948 for IRS?

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No

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client is resident of Massachusetts, and should give it to him paper as well

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In case you haven't reviewed and discussed with your client his/her MA tax residency and domicile, you may like to take a second look.  If your client will remain a MA tax resident while overseas (especially if your client is paid an expat or semi-expat package but without tax protection or equalization), you should help your client prepare for what might be an unexpected state tax liability because MA neither conforms to the IRC for FEIE nor allows a credit for foreign tax (except for taxes paid to Canada).

[HOPE2]

Hi@itonewbie.his wife is living the other country and does not have SSN so should file paper( reason )

he was in TURKEY for 5 month and he worked as self-employed and money wired in his account in the U.S.

In total he stayed in MA for 7 months. This is his case.

what does mean: PPT, FEIE, FTC and BFR?

Thanks.

[Norman2001]

PPT = Physical Presence Test

FEIE = Foreign Earned Income Exclusion or Exemption, not sure which one

FTC = Foreign Tax Credit

BFR = Bona Fide Resident

[itonewbie]

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@Norman2001 wrote:

FEIE = Foreign Earned Income Exclusion or Exemption, not sure which one

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That's exclusion (although it works like exemption by progression ever since the introduction of stacking rules).

[itonewbie]

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@HOPE2 wrote:

Hi@itonewbie.his wife is living the other country and does not have SSN so should file paper( reason )

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Even if the NRA wife is not eligible for SSN, she can always apply for an ITIN (if they decide to file jointly).  If they wish to file MFJ, you should help your clients carefully consider the downstream implications whether it is wise to do so.  And if they decide that the husband should file separately, he can still e-file MFS without the NRA wife needing an SSN or ITIN.

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he was in TURKEY for 5 month and he worked as self-employed and money wired in his account in the U.S.

In total he stayed in MA for 7 months.

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If he relocated to Turkey after spending 7 months in the US, his eligibility for FEIE would depend on a number of factors such as the intent and duration of his stay in Turkey.  Questions that need to be raised would include the amount of time he will spend in the US after his move both for business and personal purposes.

Whether the money he earns is remitted back to the US is irrelevant.  However, there could be considerations for QBU (depending on how his books and records are kept) and foreign currency gains.

With him running his own business, it will be important to also assess the classification of his business for US tax purposes (regardless of how Turkey may treat it) because those rules work differently for foreign entities.  The classification will then drive his tax and information reporting requirements in the US.

You will have more than a handful to deal with if it's considered a Controlled Foreign Corporation (CFC).  Even something as mundane as a disregarded entity will have its information return filing requirements for F.8858 beyond Sch C.

On top of all these, foreign pension, PFIC, etc. may need to be taken into account, not to mention the wife's employment income, which would come with a different set of considerations such as nonqualified deferred compensation and, again, common foreign pension.

All these are high risk, high exposure items, if not done right.

At the end of the day, his intent and actions along with a complex set of common law considerations could determine whether he remains a domiciliary resident of MA and, therefore, taxable in MA after his move.

[itonewbie]

And don't forget FBAR and F.8938, if applicable.

[HOPE2]

"Thanks a lot for the additional information.

I have already checked cases such as FBAR and 8938. His wife is unemployed, a homemaker with no kids or pension and income.

Abbreviations:

• PPT = Physical Presence Test
• FEIE = Foreign Earned Income Exclusion or Exemption (not sure which one)
• FTC = Foreign Tax Credit
• BFR = Bona Fide Resident

His wife is not eligible to get an ITIN at this time, as I checked based on ITIN instructions from the IRS. I also checked his residency in Massachusetts based on MA definition residency.

I have been working on his case for almost two weeks, addressing questions and providing answers about all the abbreviation words. Once again, thanks for the educational information; it has been very helpful.

Now, let's go back to my question:

I entered it on the 1040 worksheet line 1, but when I make a paper file, I only have 1040 pages one and two. For line 1h (Other earned income, see instructions), I have that number( FEI) but do not have any form that indicates this number for foreign earned income. In front of    "see instructions,' there is no explanation.

Is it okay to send the client just two pages of the 1040 and Form 8948 for the IRS?

The client is a resident of Massachusetts. Should I give it to him on paper as well? Does Massachusetts need any form like 8948, and should I attach the 1040 for it

[itonewbie]

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@HOPE2 wrote:

His wife is not eligible to get an ITIN at this time, as I checked based on ITIN instructions from the IRS.

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Not sure why you are insisting his wife is not eligible for ITIN.  Suggest you read the instructions again.

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I also checked his residency in Massachusetts based on MA definition residency.

The point is not about checking but planning.  But what you do with your client is your call.

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For line 1h (Other earned income, see instructions), I have that number( FEI) but do not have any form that indicates this number for foreign earned income. In front of    "see instructions,' there is no explanation.

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Line 1h is not where your client's income from the business should be reported regardless of that foreign business' classification for US tax purposes.  Suggest you familiarize yourself with the international tax reporting and peripheral issues highlighted in the previous response or refer your client to a specialist as the exposure for both your client and you could be substantial.

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Is it okay to send the client just two pages of the 1040 and Form 8948 for the IRS?

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No

[itonewbie]

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@itonewbie wrote:

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For line 1h (Other earned income, see instructions), I have that number( FEI) but do not have any form that indicates this number for foreign earned income. In front of    "see instructions,' there is no explanation.

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Line 1h is not where your client's income from the business should be reported regardless of that foreign business' classification for US tax purposes.  Suggest you familiarize yourself with the international tax reporting and peripheral issues highlighted in the previous response or refer your client to a specialist as the exposure for both your client and you could be substantial.

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I now recall someone did comment that PS doesn't use Line 1a but Line 1h.  That's fine given your client has no W-2.  The reason no F.2555 was produced probably has to do with you not having entered all the data correctly to indicate your client is eligible for FEIE.

But this brings on another problem.  You mentioned your client runs his own business.  If you entered this income on F.2555 directly, that would indicate your client is an employee of his business.  That implies that the business a body corporate and, therefore, a CFC with a F.5471 filing requirement and a whole host of other compliance and tax complexities.

[HOPE2]

thanks a lot, for part of foreign income this link I found it that is why I entered line 1 h.

https://accountants.intuit.com/community/proseries-tax-discussions/discussion/foreign-earned-income/...

[itonewbie · Accepted solution]

Like I said, it's not a problem whether it shows up on Line 1a or 1h.  It's the construct of why it should be there, based on your understanding, and what that implies in terms of the reporting of his business.