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Foreign government grants classification

shachar183
Level 3

Hello,

Individual, which is a US citizen lives abroad, received from the foreign government child support funds. The income at the foreign country is taxable, taxes have been paid (withheld by the foreign tax authority). How would you classify it in the tax return? It is not wages or salary and may not be excluded as foreign earned income, right? 

Thanks, 

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itonewbie
Level 15

NP, @shachar183.  That's what I'd probably do.

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itonewbie
Level 15

Which country?  What's the benefit called?  Have you researched the nature of these "child support funds"?

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shachar183
Level 3

Country: Israel. 

Name: 'Monthly social security grants for newborns'.

Nature: the government pays you 70% of your average salary (there is a limit) for the first 3 months after labor (adoption) (paid maternity/paternity by the government).

Topic 54 include social security benefits as unearned income which can be excluded. I think that is the answer.

@itonewbie ?

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itonewbie
Level 15

I don't doubt these payments are entitlements arisen from Israeli national insurance but what you described doesn't sound right for payments with respect to newborn.

In any case, assuming your client is a tax resident of Israel, these shouldn't qualify for Article 21 of the US-Israel DTA and would, therefore, be subject to normal US tax rules.

I didn't look up "Topic 54" but if you are referring to how social security benefits may be excluded in part from taxation, you would be mistaken; you can't treat these payments the same way because §86 applies only to benefits received under title II of the Social Security Act and tier 1 railroad retirement benefits.

Your client may, however, claim FTC for Israeli taxes paid (or accrued).

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shachar183
Level 3

I got you.

The term social security benefits is referring to US social security and tier 1 railroad retirement benefits only.

How would you classify it 'Other Income' (line 8 in schedule 1)? if so, I should also add form 1116 and claim what was paid in Israel?

 

Thanks!  

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itonewbie
Level 15

NP, @shachar183.  That's what I'd probably do.

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Still an AllStar

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