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Foreign Credit- Not populating

Level 1

The taxpayer lives in the US  but has foreign income for work he did remotely.  He is paid in Euros. I have completed Form 2555 and Form 1116 but neither the income nor the taxes paid are populating on Form 1040.  Anyone has any idea what  I may be missing.  I cannot seem to figure why the Foreign tax that the tax payer paid is not being credited on Form 1116 Line 9. I have reviewed the form several times but the credit still wont populate.  Thanks for your help.

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7 Replies 7
Level 15

If he performed his services in the US, the income is sourced to the US.  Getting paid by clients located in a foreign country does not make an income foreign source.  If he lives in the US and performs services remotely, US is his tax home.  He would not be eligible for foreign earned income exclusion.

What kind of foreign tax did your client incur for working remotely?  Did your client set up a foreign entity, conclude contracts using that entity, and bill his clients through that entity?  Hope not.  If so, there's a lot more your client might have to worry about.

This is not an input question.  This is a structural issue and a technical question.

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Still an AllStar
Level 1

Thank you so much Itonewbie for your response.  Apparently some of his work involved travelling to Europe while another are done remotely. He is reporting all income he received from Europe. 

Two problems at this time.  1. The foreign income is not flowing  to Form 1040 and

2. Should'nt he get credit for the income that was taxed by the foreign country if it is subject to US tax?

Unfortunately, I'm not sure what's the serious technical part of this I'm missing.  Any clarification would be greatly appreciated.  

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Level 15

1) Based on the limited facts you provided, your client does not qualify for FEIE.  The income should not be reported on F.2555.

2) You did not answer my questions about the structure of his business.  This is a pertinent question in relation to FTC.  Factors such as where the entity is located and how contracts are concluded are important for international taxation.  Income related only to the days he performed services overseas, that portion of the income is foreign source and could be eligible for FTC.  However, FTC, inter alia, can only be claim on foreign taxes that are compulsory.  For short period of presence, especially in Europe where the US has extensive treaty coverage, it calls into question which are the countries he paid taxes to and whether these are taxes that must be paid (in light of domestic tax law and DTA).

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Still an AllStar
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Level 1
  • One more clarification. This is indeed technical.  A contract exist between a US company he formed  with co-ownership in the foreign company. What's your fee for an hour consultation.  
  • Thanks
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Level 15

Ah, he co-owns a foreign entity.  This could be problematic.  Did he receive any tax advice before setting that up?  What kind of entity is it?  Where is it located?  How much ownership does he have in that entity?

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Still an AllStar
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Level 1

Yes, he got legal advice on setup & ensuring the business relationship with the Foreign company (in the Netherlands) in terms of the  contracting with the company.  He set up the US company as an LLC in 2019. 

To  complicate even more, he also received income from England. On this income, no taxes were withheld. 

I'm going to speak  to him to get more details on the business relationship and the legal guidance he received.

He got his GreenCard in 2019. 

 

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Level 15

Legal advice, yes, but question is whether he's got tax advice on both sides of the Atlantic.  More info needed.

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Still an AllStar
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