Can you apply a foreign tax credit against Medicare taxes?

[ryanf1475]

Sorry, one more question! I noticed that my tax software is not applying my foreign tax credit against my Medicare taxes. Is this right? I am curious now -- do Medicare taxes fall into a separate category that you cannot apply tax credits against? Thanks for any replies.

 

[LdiJ]

Sorry, one more question! I noticed that my tax software is not applying my foreign tax credit against my Medicare taxes. Is this right? I am curious now -- do Medicare taxes fall into a separate category that you cannot apply tax credits against? Thanks for any replies.

Yes, Medicare taxes fall into a separate category. It used to be more obvious on the old 1040, but with the new forms it would be less clear to a layperson.

 

[ryanf1475]

Yes, Medicare taxes fall into a separate category. It used to be more obvious on the old 1040, but with the new forms it would be less clear to a layperson.

ok, thanks!

 

[Taxing Matters]

Sorry, one more question! I noticed that my tax software is not applying my foreign tax credit against my Medicare taxes. Is this right? I am curious now -- do Medicare taxes fall into a separate category that you cannot apply tax credits against? Thanks for any replies.

LdiJ is right, but I'll provide a little more explanation. The foreign tax credit is a credit against income tax. FICA taxes — which are the Social Security and Medicare taxes — are not part of the income tax. They are separate taxes. The Form 1040 includes some lines for taxes other than income tax out of convenience for the taxpayer and the IRS, and the forms are careful to ensure that income tax credits and deductions do not reduce other taxes that are covered on the form.

 

[ryanf1475]

LdiJ is right, but I'll provide a little more explanation. The foreign tax credit is a credit against income tax. FICA taxes — which are the Social Security and Medicare taxes — are not part of the income tax. They are separate taxes. The Form 1040 includes some lines for taxes other than income tax out of convenience for the taxpayer and the IRS, and the forms are careful to ensure that income tax credits and deductions do not reduce other taxes that are covered on the form.

thanks to both of you!

 

[ryanf1475]

OK, I have one more question on this subject in case anyone can help... I had called the IRS hotline for international tax payers about a month ago with a simple question: what do I put on line 17 of this form (2555 EZ) (https://www.irs.gov/pub/irs-pdf/f2555ez.pdf)? The wording is confusing because it says to enter "the total foreign earned income you earned and received in 2018" and the instructions just repeat this same language. The guy told me I was supposed to put my GROSS earnings, not after-tax earnings. Which was surprising because the language says "earned and received." Obviously I did not "receive" the taxes withheld. But now my tax software won't let me enter an amount higher than my after-tax earnings, so I am thinking the guy must have been wrong. Could it be? Please help!

 

[LdiJ]

OK, I have one more question on this subject in case anyone can help... I had called the IRS hotline for international tax payers about a month ago with a simple question: what do I put on line 17 of this form (2555 EZ) (https://www.irs.gov/pub/irs-pdf/f2555ez.pdf)? The wording is confusing because it says to enter "the total foreign earned income you earned and received in 2018" and the instructions just repeat this same language. The guy told me I was supposed to put my GROSS earnings, not after-tax earnings. Which was surprising because the language says "earned and received." Obviously I did not "receive" the taxes withheld. But now my tax software won't let me enter an amount higher than my after-tax earnings, so I am thinking the guy must have been wrong. Could it be? Please help!

It is definitely the gross income that belongs on line 17. That same amount but in a negative amount, belongs on line 21 of Schedule 1 as well. So if line 17 is 80,000 then line 21 of Schedule 1 should be (80,000).

 

[ryanf1475]

It is definitely the gross income that belongs on line 17. That same amount but in a negative amount, belongs on line 21 of Schedule 1 as well. So if line 17 is 80,000 then line 21 of Schedule 1 should be (80,000).

ok, thanks, but what makes you sure it is gross?

 

[LdiJ]

ok, thanks, but what makes you sure it is gross?

30 years of experience as a tax professional.

 

[Taxing Matters]

Which was surprising because the language says "earned and received." Obviously I did not "receive" the taxes withheld.

The wording is the way it is because not all income you earn in a year is necessarily received in that same tax year. When you do get paid, you receive the gross income for that payment, including the tax withheld. That withholding is every bit a part of what you got, it is just that you directed it to the government to be credited against taxes instead of getting in your pocket. In other words, the tax law sees it exactly the same as though you got the entire payment in your pocket and then you sent the amount withheld to the government. Both situations are exactly the same. Moreover, you would want it to be the gross income on this form because that increases the amount of foreign earned income that gets excluded.

 

[ryanf1475]

Oh, I see... OK, many thanks to you both! By the way, do either of you know whether it's possible to carry forward (or back) any "excess" exclusion? e.g. if I exclude 100k but income is only 90k, can I carry forward a 10k exclusion somehow?

 

[Taxing Matters]

Oh, I see... OK, many thanks to you both! By the way, do either of you know whether it's possible to carry forward (or back) any "excess" exclusion? e.g. if I exclude 100k but income is only 90k, can I carry forward a 10k exclusion somehow?

There is no carry forward for the exclusion.