Does the Foreign Earned Income Exclusion apply to state taxes, too?

[ryanf1475]

Hello, I was paid the last couple of years by the University of Illinois (physically in Illinois), but I was physically in China the whole year. I did qualify for the FEIE federally, but am I allowed to exclude this income on my Illinois state return, too? I always assumed not, but now I am second-guessing myself upon closer inspection of Line 19 of the Illinois 1040 NR Schedule, located here: https://www2.illinois.gov/rev/forms/incometax/documents/currentyear/Individual/IL-1040-Schedule-NR.pdf

If I simply do what Line 19 is telling me (enter the negative amount from my federal 1040 Sched. 1 Line 8), then the income would be excluded.

Here is the 1040 form itself: https://www2.illinois.gov/rev/forms/incometax/Documents/currentyear/individual/il-1040.pdf

Thank you so much!!

 

[davew9128]

Depends on the state. I don't know anything specifically about IL. I would question why you need to report the income on an IL return if you were residing outside the US. You aren't an IL resident or earning the money for work performed in the state.

 

[ryanf1475]

Well, state taxes were withheld from my paycheck, that's why I'm filing the return.

 

[davew9128]

Well, state taxes were withheld from my paycheck, that's why I'm filing the return.

Doesn't answer the question. If the income isn't taxable in IL, the answer to your question is moot.

 

[ryanf1475]

Doesn't answer the question. If the income isn't taxable in IL, the answer to your question is moot.

Sorry, I mean, if I wish to recoup those withheld taxes, I would need to report the income from my W2, then exclude it, right?

 

[davew9128]

I would argue that the wages were never taxable to IL in the first place and claim a refund of the withholding.

 

[LdiJ]

Well, state taxes were withheld from my paycheck, that's why I'm filing the return.

That is a problem. You should have talked to the University about stopping the IL withholding. Go ahead and file the return but exclude all of the income. You will probably have to fight a bit with IL, but eventually you should be able to get the withholding back. I had a similar problem with both IN and OH for a client that worked for a big US firm, but was located in southeast Asia for about 5 years. The payroll system simply would not function without naming a state. In the end, to fool the payroll system we just changed his residence state to one of the states that don't have income tax.

 

[davew9128]

That is a problem. You should have talked to the University about stopping the IL withholding. Go ahead and file the return but exclude all of the income. You will probably have to fight a bit with IL, but eventually you should be able to get the withholding back. I had a similar problem with both IN and OH for a client that worked for a big US firm, but was located in southeast Asia for about 5 years. The payroll system simply would not function without naming a state. In the end, to fool the payroll system we just changed his residence state to one of the states that don't have income tax.

I too have had similar problems with a few people. As you note, US payroll systems are not equipped to deal with employees outside the US and the easy solution is to code them as a resident of a non-taxable state.

 

[ryanf1475]

That is a problem. You should have talked to the University about stopping the IL withholding. Go ahead and file the return but exclude all of the income. You will probably have to fight a bit with IL, but eventually you should be able to get the withholding back. I had a similar problem with both IN and OH for a client that worked for a big US firm, but was located in southeast Asia for about 5 years. The payroll system simply would not function without naming a state. In the end, to fool the payroll system we just changed his residence state to one of the states that don't have income tax.

So even if I had to include some Illinois wages on my federal return (17K - the amount of my 457 deferrals, so they wouldn't be illegal), I should still exclude ALL income in my Illinois return, is this right? That means Column B of the NR schedule (https://www2.illinois.gov/rev/forms/incometax/documents/currentyear/Individual/IL-1040-Schedule-NR.pdf) would be about -88K whereas Column A would be -71K. Is that OK?

 

[LdiJ]

So even if I had to include some Illinois wages on my federal return (17K - the amount of my 457 deferrals, so they wouldn't be illegal), I should still exclude ALL income in my Illinois return, is this right? That means Column B of the NR schedule (https://www2.illinois.gov/rev/forms/incometax/documents/currentyear/Individual/IL-1040-Schedule-NR.pdf) would be about -88K whereas Column A would be -71K. Is that OK?

You don't currently live in IL so yes, you would exclude all of your income. Look at it this way...If you moved to Indiana and your employer forgot to change your resident state to IN instead of IL, you wouldn't owe any IL taxes. Its the same principle.