[PPT]

Hi experts

I am an Indian national, entered the US on July 16th, 2006 on H1B visa and continued to work in the US for the rest of the year. Prior to that I was working in Singapore for over six years continuously since 1999, of which the last 3.5 years were as permanent resident there (including the first six months of 2006). I'm still hold the Singapore PR (similar to Green Card in the US).

I'm married and has a 2 yr old kid. Wife and kid (on H4) are in the US with me since Nov'06.

Since I do not qualify as a US tax resident for 2006, I intend to avail the 'first year choice' to be treated as a tax resident for the year and subsequently file as MFJ. I seem to satisfy the conditions for bonafide residency and physical presence in Singapore, as well as the 'tax home' test for the period of bonafide residency (though I'm not absolutely certain, given the legal jargon). My earnings in Singapore are not connected to the US in any way and are taxed there.

Now,

(1) Would I quailfy for foreign income exclusion (for my wages in Singapore for the first 6 months of the year) while choosing to be treated as a tax resident? I've been speaking to H&R Bloc and they think I qualify. If I don't, Let me know why, so that I can clarify with them again.
(2) I did a search on the country list that has tax treaties with the US and don't seem to find Singapore on it, but India is. How does it effect my situation?

Thanks in advance for your time and responses.

PPT

[AtlantaTaxExpert]

1) You may or may not qualify for the Foreign Tax exclusion. I would have to research it to be sure. My initial impression is that you do NOT qualify. You DO qualify for the Foreign Tax Credit, however.

2) Who issued your passport under which the visa was granted and on which you traveled to this country? That is the key.

[PPT]

Thanks ATE for your time and reply.

(1) As I understood from the publication text, I suppose I meet the conditions for bonafide residency and the physical presence test (in Singapore). What I'm not sure of is whether I can claim Singapore as my tax home, while asking to be treated as a tax resident in US for the whole tax year. To be exact, I was in Sinagpore till 21st, June'06 (and the preceding 6 yrs), and in the US between 16th July and end of the year. For the 3 weeks of 2006 in between, I was on India on holiday with no earnings for the period.

(2) I hold an Indian passport. I'm an Indian national, and a permanent resident of Singapore.

It's important that I understand for sure the foreign income exclusion clause, as my income outside the US (in Sing dollars) was almost equal to what I earned in the US for the later part of the year. Without the exclusion, it may not make sense for me to file as a resident.

Thanks again for your time and advice.

Regards
PPT

[taxsearcher]

I'm really not in the habit of helping H&R Block people learn the tax law :)

But they are wrong. You certainly do not qualify for the foreign earned income exclusion. Not at all. If H&R Block need my help they may contact me directly and for a consulting fee I will work through it with them ;)

[PPT]

Hi experts

OK. Since I don't qualify for the exclusion, filing as a resident doesn't seem to be a good option for me. Singapore has one of the lowest tax rates and it doesn't add up well to pay US taxes on Singapore income. . Help me with the following clarifications, so that I make a more informed decision:

(1) With regard to foreign 'tax credit' - I read from the other posts here that it helps avoid double taxation. Does it mean that the tax paid abroad is deducted from the final 'computed tax' in the US? Or is it deducted from the 'taxable income' (pre-tax computation)?

(2) If not filing as a resident, what would be next best thing to do? Forgo the standard deduction etc and file as a non-resident? Or is there any other option? Like dual status alien (does it apply in my case?).

(3) Also, I'm curious to know what dis-qualifies me from foreign income exclusion benefit. I read the publication a few times but couldn't figure it out myself.

Thank you
PPT

[taxsearcher]

PPT,

Based on the information you provided, it appears that you are by default a non-resident. You would have the option to wait and make appropriate elections to be either a dual status alien or to be resident all year (if you file jointly with your wife).

You cannot possibly qualify for the foreign earned income exclusion because you meet neither test. You were not a bona fide resident of Singapore for 2006. You may have been out of the US for some of the time before you became a resident but that does not count for the 330 day test.

A tax credit reduces tax liability directly. There are restrictions associated with the foreign tax credit. However, in a basic sense, if your Singapore tax rate was lower than the US rate, then you would end up still owing US tax.

Good luck.

[PPT]

Hi Tax Searcher

There seem to be some difference in interpretation from what I see in the publication to your assessment of my situation. This is what the publication says (and coincidentally, the example is close). It's legthy text, but is very relevant to the discussion. Hope you have the time to read through.

publication 519:

If you are physically present in a foreign country or countries for at least 330 full days during ANY period of 12 consecutive months, you may qualify for the foreign earned income exclusion.

Publication 54:

Bona fide resident for part of a year: Once you have established bona fide residence in a foreign country for an uninterrupted period that includes AN entire tax year, you will qualify as a bona fide resident for the period starting with the date you actually began the residence and ending with the date you abandon the foreign residence. You could qualify as a bona fide resident for an entire tax year plus parts of 1 or 2 other tax years.

Example: You were a bona fide resident of Singapore from March 1, 2004, through September 14, 2006. On September 15, 2006, you returned to the United States. Since you were a bona fide resident of a foreign country for all of 2005, you also qualify as a bona fide resident from March 1, 2004, through the end of 2004 and from January 1, 2006, through September 14, 2006.

Physical presence test:

Generally, to meet the physical presence test, you must be physically present in a foreign country or countries for at least 330 full days during A 12-month period. You can count days you spent abroad for any reason. You do not have to be in a foreign country only for employment purposes. You can be on vacation time.

Your 12-month period MUST be made up of consecutive months. ANY 12-month period can be used if the 330 days in a foreign country fall within that period.

You work in New Zealand for a 20-month period from January 1, 2005, through August 31, 2006, except that you spend 28 days in February 2005 and 28 days in February 2006 on vacation in the United States. You are present in New Zealand 330 full days during each of the following two 12-month periods: January 1, 2005 - December 31, 2005, and September 1, 2005 - August 31, 2006. By overlapping the 12-month periods in this way, you meet the physical presence test for the whole 20-month period. See Figure 4-B below.

Tax Home:

Your tax home is the general area of your main place of business, employment, or post of duty, regardless of where you maintain your family home. Your tax home is the place where you are permanently or indefinitely engaged to work as an employee or self-employed individual. Having a “tax home” in a given location does not necessarily mean that the given location is your residence or domicile for tax purposes.

What I'm not sure of:

(1) Is the above stipulation only applicable to US citizens / Tax residents going abroad (or) does it also apply to new entrants to US choosing to be treated as residents.

(2) Do I qualify for the Tax home clause, as I'm a new entrant.

Thanks for your time and patience
PPT

[taxsearcher]

Those are the correct two tests. However, you must be a US citizen or resident who meets one of those tests. Therefore, you cannot count those days when you were a non-resident (even though you were in Singapore). You can only count the days during which you were a resident. So if you elect residency for all of 2006, you can only count the days from Jan 1 up until the time you came to the US.

[PPT]

Hi Tax Searcher

Thanks for the clarification. From the discussion, I intend to proceed as follows:

(1) Request for extenstion.
(2) File as a dual status alien after I become a resident in 2007. By which I understand I'd not be eligible for standard deduction, but I can avail of dependent deductions for my wife and my kid (which are not available if I file as a non-resident for whole of 2006).

Does the above apply to my situation or there are other clauses that don't permit me to do it either? Are the tax rates different of rdual status filing?

If only the tax laws are a little more simpler.. :(

Thank you
PPT

[AtlantaTaxExpert]

Sounds like a plan to me.

[PPT]

Hi ATE and Tax Searcher

Thank you for your expert advice. It was very helpful in understanding what's the right option for me. Need one last clarification though.

While filing as dual status alien after becoming resident in 2007 (without standard deduction and claiming only personal and dependent exemptions), what would my filing status be? Is it 'Married filing Jointly' or 'Married Filing Separately' ?

Thank you
PPT

[AtlantaTaxExpert]

PPT:

Married Filing Separately.