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foreign source compensation

rjsctcpa
Level 2

my client is employed by the french mission to the UN in NYC....a foreign national she had diplomatic status until june 30 when it was surrendered in favor of a green card when she married an american

for the first 6 months she was u.s. tax exempt but paid french income tax on her compensation from the french mission

the spouses must be married filing separately since the french national did not become a u.s. resident until receiving her green card

alternatively, she may elect to be treated as a resident for the full year...this would require reporting her exempt compensation as taxable....this compensation has already been taxed by france.

could this compensation be treated as foreign source income so as to permit a credit for the french tax???.....i believe foreign missions and the un itself are not considered u.s. territory

thanks for any help

 

regards

 

bob

 

 

 

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5 Replies 5
hedgeslaw
Level 3

First, determine if the services are excluded by US-France treaty.

Your client's service sounds like it is considered "Dependent Personal Services" and under the US-France treaty, the first 183 days of income is excluded from US taxation ... however, that doesn't mean it can be ignored and not reported.

In general, US Citizens and US Residents must reported on their world-wide income. And they must pay US income taxes on their gross worldwide income, UNLESS the non-USA-source income is excluded or modified by tax treaty. [IRC §61(a)]. File form 8833 to exclude that treaty based modification and attach to their 1040.

If Client pays tax to a non-USA country on non-USA-sourced income, Client can sometimes reduce or eliminate their US income tax by (1) Foreign Income Exclusion or (2) Foreign Tax Credit. These 2 method may cause different results, so do the math to get the best result.

Next, if services and income are not excluded by tax treaty, you must determine their "residency" (this has nothing to do with citizenship).

RESIDENCY - In general, is the location (tax locality) of their permanent home or principal place of abode:

PART YEAR RESIDENT: Generally, you are a part-year resident if you moved to or from a tax locality during the tax year with the intention of establishing a permanent residence in your new tax locality and not currently returning to your prior residency..

NON-RESIDENT: Generally, you are a nonresident if you do not have a permanent home in a tax locality at any time throughout the tax year. e.g.. you intend to return to your prior residency.

DUEL STATUS CITIZENS (this can happen in the year of arrival & yr of departure as a “resident”)-

If they are Green Card holder (Resident Alien), they file 1040. If they have given up, lost  or never had their Green Card status (Non-Resident Alien), they file 1040NR and 8833.

There may be restrictions on filing MFJ in some cases so review thoroughly the IRS publications on this topic. 

The FBAR-114 may be required if foreign holdings exceed $10,000 and on their Form 1040, Form 8938 is used to report client’s accounts, holdings and income.

IF THIS ANSWERS YOU QESTION, PLEASE MARK IS "SOLVED"

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rjsctcpa
Level 2

thank you for your input...and apologies for the delay in responding

it is clear the client is a u.s. resident from the date she applied for a green card while living in the usa with her fiance.....so she has a split year....making her unable to file jointly

it is also clear that prior to applying for a green card, as a diplomat, she was exempt from u.s. income tax

as a condition of applying for a green card she had to surrender that diplomatic exemption

if it would be advantageous for her to elect to be taxed as a full year u.s. resident, thereby filing jointly with her husband, would her earnings at the NY french embassy be sourced as foreign so the french tax that she paid could be claimed as a foreign tax credit to mitigate the effect of putting that income in her joint tax return????

 

thanks for the help

 

regards

 

bob

 

 

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hedgeslaw
Level 3

Here are my thoughts to help guide your investigation:

There is an IRS publication on these topics, but this is the way I understand it ...

Look into the "substantial presence" test as well as the "green card" test to determine "residency" status.

Look into the "First Year Choice" rule.

It is my understanding that the MFJ status may be available if one spouse is a legal resident and the other (a non-resident) "elects" to be treated as a legal resident and are married at year end.  

Election - If, at the end of your tax year, they are married and one spouse is a U.S. citizen or a resident alien and the other is a nonresident alien, they may be able to ELECT on a joint return to treat the nonresident as a U.S. resident using the MFJ -Married Filing Jointly tax rates. This may include situations in which one is a nonresident alien at the beginning of the tax year, but a resident alien at the end of the year, and the other is a nonresident alien at the end of the year. This may be your approach: Attach a statement, signed by both spouses, to their MFJ married filing jointly return for the first tax year for which the choice applies. It should contain the following information:
-A declaration that one spouse was a nonresident alien and the other spouse a U.S. citizen or resident alien on the last day of your tax year, and that you choose to be treated as U.S. residents for the entire tax year, and
-The name, address, and identification number of each spouse. (If one spouse died, include the name and address of the person making the choice for the deceased spouse.)

They can suspend or revoke the election if the situation warrants it

If no election, consider Head of Household status.

It may be the case that since the embassy is foreign soil, her earnings may be considered foreign sourced so look into a possible tax treaty exclusions for personal services at the embassy and need to report that income. Determine the nature of the embassy employment ... researcher, independent contractor, employee, etc. ... refer to the French/US tax treaty ... and file an 8833 for the treaty based exclusion.

RULE If Client pays tax to a non-USA country on non-USA-sourced income, Client can sometimes reduce or eliminate their US income tax by (1) Foreign Income Exclusion or (2) Foreign Tax Credit.

There may be an issue to resolve the French withholding on her wages and a refund may be in order.

Hope this helps. If so, please mark your questions SOLVED so others can find an answer quickly

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rjsctcpa
Level 2

Sorry for misunderstanding the question 

the question was whether I can source as foreign salary paid by the French embassy in ny while taxpayer was a diplomat and subject to French tax but by treaty not u.s. tax 

taxpayer may waive the exemption to permit joint filing

its a fairly unique question 

apologies if I wasn’t clear before

regards

bob

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hedgeslaw
Level 3

You have to get to the bottom of the type of work being done by the worker to analyze it for tax treaty purposes ... which will then determine if subject to US tax. It is obviously subject to French tax since withholdings are being done.

Your last question was rather contorted and I could not parse it to make any sense.

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