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rg27 · Mar 25, 2012, 07:43 PM

Hi,

I am on H1B and my wife is a dependent on H4. So she doesn't work in US and hence has no income here. However, before marriage she was working in India for a couple of months in 2011 (for which she has already paid TDS in India) and also had income from other sources in India. So I am trying to understand under what status should I file taxes in US.

Option 1: Married Filing Jointly - I would have to pay taxes on our worldwide income which means I would have to pay taxes on her income in India also.

Option 2: Married Filing Separately - In this case -
1. Can I claim her as dependent on my tax return? If yes, she doesn't have a SSN or ITIN. Do I apply for her ITIN with my tax return?
2. She will be filing her taxes in India. Does she need to file her tax return here also? If yes it will be as Non-Resident Alien so she will have no income at all on her return. Is this correct?

In my case, my tax liability will be lower if I choose option 2 because I will pay a lower tax rate on her income in India. However, am I allowed to do that? How should I go about it. Please advise.

Thanks in advance.

MukatA · Mar 25, 2012, 07:50 PM

Option 1. Yes, both of you must report worldwide income. For foreign income you will file Form 2555 Foreign income exclusion and/or form 1116 Foreign tax credit. That is you will pay very little tax on foreign income. Your U.S. Tax Return: U.S. Citizen or Resident with Foreign Income

Option 2. You can not claim your wife as she has income.
2. She is not required to file U.S. tax return.
Normally, liability will be lower in option 1. Do return both ways and decide what is best for you.

rg27 · Mar 25, 2012, 08:17 PM

Thanks MukatA for your quick reply.

I am confused regarding option 2. From what I found on other threads in this forum (https://www.askmehelpdesk.com/taxes/...-us-57235.html), I can still claim her as a dependent because she has no "US source income or income effectively connected with a U.S trade or business". Her income was in India not in US. Is my interpretation incorrect?

Do you think by choosing Option 1 and taking foreign tax credit I will save more taxes?

rg27 · Mar 25, 2012, 08:36 PM

I went through your blog. My wife isn't eligible to use form 2555 because she was in US for 217 days in 2011. So Foreign income exclusion doesn't seem feasible anymore. Do you think Option 2 will be best in this case?

AtlantaTaxExpert · Mar 25, 2012, 09:09 PM

The ONLY way to klnow for sure is to model the return BOTH ways and compare results.

rg27 · Apr 1, 2012, 03:43 PM

Hello tax experts,

Thanks a lot for your help, I did some calculations both ways and found that I save more taxes MFJ. I have a few questions related to income in India

1. My wife had 2 months of salary income in India - This will come under general category income in Form 1116 - is that correct?
2. As she left the job, her Provident Fund was returned. This has 3 components - Employee contribution, Employer Contribution and Pension. Under what category do each of these income come in Form 1116? Are all these passive income?
3. She has some investments in Fixed Maturity Plan which gives out dividends which are tax free in India. Do I have to pay taxes on those in US? If yes, do they come under Passive income?
4. I had some income from rent in India last year. I also had some losses from sales of shares which nullify my rent income. So I paid no foreign taxes. Do I still need to report these on form 1116? If not, do I need to report this income and losses on 1040?
6. Finally, if I need to file form 1116 for my income too, do I have to file a separate form for my passive income and separate on for my wife or can I combine them on one?

Thanks a lot for your expert advice!

AtlantaTaxExpert · Apr 2, 2012, 11:08 AM

1) Yes; salary is considered "GENERAL income".

2) Passive income.

3) yes, it IS taxable, and yes, it is passive income.

4) The Sale of the stock shares are reported on Schedule D. the rental income (plus associated expenses) are reported on Schedule E.

5) you can combined YOUR and your wife's passive income on ONE Form 1116.

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