Tax question: Reporting tax-exempt income for foreign national

I use TurboTax to do my taxes and usually do the taxes of a few close family members. I usually just enter the info into TurboTax for relatively straight forward tax situations (Read: I am comfortable with basic tax situations but, like most people, if something complicated turns up I’m stumped).

One relative has a spouse who is not a US citizen. She works for an international organization and her income is, according to the organization, tax exempt. She does not receive a W2 or a 1099 or any other document that I can enter into the program. I have an employment verification form which lists her salary, and a letter stating that the income is tax exempt.

I’m wondering if I should report this income at all on their taxes. If I should report it I have no idea how or where to enter this income. My main concern is that the itemized deductions will be greater than the income of the American citizen spouse. This may throw up a red flag as ignoring the tax exempt income could qualify them for earned income which, I’m fairly certain, would be incorrect to claim just because I ignored the tax exempt income.

Is anyone familiar with how to report tax exempt income? Also, if I ignore it on the tax forms would they then be eligible for earned income or any other benefits that they might not qualify for if the income is reported? I can’t imagine that this would be the case but I’m stumped.

Have you considered checking out these folks?

I have considered it and have seen that page but it really doesn’t answer my question. I know she is tax exempt. I’m wondering if I have to report the income and, specifically, how to enter it using TurboTax. Additionally, if I am not reporting the income then, as I mentioned, they would qualify for EITC…but wouldn’t if the income is reported.

If you file Form 2555 or 2555-EZ (Foreign income and exclusion) then you cannot take EIC and possibly other things, per IRS instruction. Those forms are the general ones used for foreign income though. Sorry, I don’t know if you would still file 2555, but the forms or instructions don’t seem to say anything informative about that.

“Tax exempt income” according to who? And does the IRS agree?

Thanks for the form info. My question about EIC is for her spouse who is a citizen and pays taxes. He would qualify for EIC if the foreign income is ignored but I’m pretty sure I shouldn’t be doing that. I’m fairly certain the IRS wants to know the total income regardless of whether or not it is tax exempt.

Tax exempt according to both the IRS and the company. There is no tax avoidance or any type of scam here. I’m just unsure if/how to report the income.

You’re doing a nice thing by prepping taxes for your family, but you may just have to tell this relative that her situation is too far outside your expertise.

Well, I’m using TurboTax and I don’t believe it is really all that complicated. I’m just not sure how to enter tax exempt income for a resident alien. I am sure I can ignore it on the tax return. My main concern is that, if I ignore this income, they would qualify for EIC. I just don’t know if that’s legal.

Very interesting question. I am not a tax person, but I do my own taxes and am married to a foreigner, and I LOVE reading IRS publications. (One of those is a lie!)

Some possibilities:

Does the foreign spouse have an SSN that is valid for work? One of the IRS publications stated (if I remember correctly) that aliens earning tax exempt income from International Organizations cannot willingly particiapte in the social security program (sometimes you have to have an SSN in order to get a license, etc.). Either that or some other situation may have resulted in her being issued a SSN that is noted as “Not Valid For Work”. In this case, the couple would not be eligibile for the the EIC regardless of income. (In this case, you would enter “No” on the line for the EIC on the 1040, per page 51 of the instructions for the 1040 for 2013.) If it is “Not Valid for Work Without DHS Authorization” and she has valid authorization, then she has a valid SSN for the EIC.

If you are unable to find a clear answer and they want to be conservative (or just out of a sense of general principles) and not take the EIC even if they might be entitled to it under the rules, just put “No” on line 64 in any case, and that solves your problem of how specifically to fill out the paperwork without appearing to be entitled to the EIC when not reporting the tax exempt income.

If it was me, personally (and I am not advising anyone else what to do), I would rely on the fact that the rules for the EIC very explicitly refer only to “taxable” earned income, and go ahead and take the EIC if excluding the exempt income left me in a range where I was eligible for the EIC. The IRS generally words those rules very specifically and for meaning, so tax exempt earned income should be able to be safely excluded from consideration.

In terms of where to report the income, if you feel that is still an issue, I suspect that since it is tax exempt, it does not need to be reported on the 1040 at all, but if you want to be safe, nothing stops you from including a letter or statement with the return explaing the matter, and maybe including a copy of that letter from the organization stating the income is tax exempt. You will have to file a paper return in this case, though.

But really, I am just some guy on the Internet, not a tax accountant or anything.

I spoke to an IRS agent today and you are basically correct. Nontaxable income does not need to be reported at all. The EIC only takes into account taxable income so they basically told me to go for it. I was kind of surprised that they weren’t really sure at first…sorta had to think their way through it. Just goes to show you how convoluted the tax code has become.

If you are filing jointly, the income is taxable. The amount is complicated by treatys and foreign income exclusion.

That is not correct.

Ok, I change my mind.

First, I didn’t ask for any opinion concerning that tax status of the income.

Second, as I mentioned, she is a resident alien working for an international organization. Her income is tax exempt according to IRS rules. No taxes were witheld and she did not receive a W2 or a 1099. Being married and filing jointly has no bearing on any of the above. I called the IRS and explained the situation and they informed me that I should not even report the income.

Do you have any evidence to back up your claim? If so, please give the IRS a call and explain it to them.