Foreign income exemption

[valeriebach]

I have a couple living in Mexico with dual citizen (US/Mexico). The wife owns a store there. The husband is her employee. Is his W-2 income exempt from income tax?

[Expat_Helper]

The answer is: possibly, if they qualify, and each individual has to _claim_ the Foreign Earned Income Exclusion by filing a timely Form 2555. There is a host of issues here; it may not be beneficial to claim the FEIE if the Mexican income tax is higher than U.S. federal tax, instead use Form 1116 to claim foreign tax credits. Generally the foreign tax returns should be filed _first_ to establish the final foreign tax due amount.  Also, there is no Form W-2 filing requirement for Mexican resident employers with Mexican resident employees. Is the store a foreign company? If so, she probably has a Form 5471 filing requirement. And remind them about the FBARs.

[valeriebach]

The couple legally married in 2019.   For years, one of them who considers herself as the owner reported the store as a self-employed business, while paying her spouse W-2 income.  They both filed in Mexico and the U.S.  He filed the 2555 with his return every year.  Now that they're legally married, I can't imagine this is right.  I didn't do their tax returns in the past.  It's really twisting my brain.