Filing Form 2555 – Easier Than Expected, There Is A But Though…

By: Pete
Date posted: 12.19.2011 (5:00 am) | Write a Comment  (0 Comments)

      Post a Comment

Today, I installed myself to file the form 2555 for foreign earned income which I had to file because I was above the income limit of $91,500 for 2010 which excluded me from using form 2555-EZ. I was expecting to be working on this one for a while and did print out the form as well as the IRS guide on how to file this specific form. It does turn out that it was easier for me than expected. Why?

The good: It is not necessary or even useful from what I understand for me to file for most of the income exclusion/deductions in form 2555, especially the Housing Exclusion/Deduction. From what I understand, those make it possible to diminish the taxes payable by getting credits for money earned abroad but also anything spent on housing, rent, insurance, etc. There is a whole list and I was certainly preparing to file for those…until I started reading about the Foreign Tax Credit.

The Foreign Tax Credit makes it possible to get a tax credit for any taxes paid abroad if 4 tests are met:

-Tax must be imposed on me
-Taxes must have been paid or accrued
-Taxes must be the legal and actual foreign tax liability
-Taxes must be “income taxes”

Those clearly apply to the taxes that I have paid to the Canadian government. The next test is simple. Is that credit enough to help me avoid any taxes to be paid? This would of course depend on how much taxes that you end up paying but in my case, I can testify that I (unfortunately) paid out much more. It is simple in the end. If the tax rate that I paid is higher than what the US government charges its citizens, the credit will be enough. Clearly, as a Canadian, that is the case.

Therefore, I will not need to file for those other deductions as the Foreign Tax Credit (FTC) alone will be enough to help me avoid any taxes to be paid. That is the good news! Through form 2555, I am still able to take down my income by $91,500 which is not necessary, but I will still do it, it does not seem optional and will certainly not hurt.

The Bad News

The bad news of course is that I must now file a new form, to claim the Foreign Tax Credit, form 1116. Next week, I will fill out the form 2555, which should be fairly easy given the fact that I will not be filing for these deductions. Then, I will move on to file form 1116. With any luck, that will be it and I will be able to complete form 1040.

There might be more surprises in store for me…we’ll see…!!!

No Comments »

No comments yet.

RSS feed for comments on this post. TrackBack URL

Leave a comment