Ask the tax adviser By George Saenz • Bankrate.com

Taxes and the transatlantic couple

Dear Tax Talk:
I will be working some years in Europe whereas my husband will not. We submit our taxes together. If my income tax in the country of residence (for example, the United Kingdom) is higher that the U.S. income tax, can I claim a credit on our joint U.S. tax submission and get a tax refund? Can I still deduct housing costs in our joint tax report, even if I don't pay Uncle Sam any tax as the country of residence has a higher income tax rate? Many thanks for your advice.
Pauline

Dear Pauline:
When you reside abroad, you can either claim an exclusion from income for your foreign wages, including a deduction for housing costs, or a credit for taxes paid on that foreign income.

You can't, however, double dip, which means you can't get a credit for foreign taxes paid on excluded income.

Housing costs in excess of a certain threshold are deductible and wages up to a certain amount are excludable. In 2003, you can exclude up to $80,000 in foreign earned income if you're outside the country for the whole year.

You can also deduct housing costs in excess of 16 percent of what a GS-14 employee earns. Government employees have pay scales depending on their qualification or rank referred to as GS levels. In 2002, housing costs in excess of $10,842 are deductible. For example, if you spent $20,842 to rent and live in a UK flat, you could deduct $10,000 of these costs. Together with the income exclusion, you would be in effect writing off $90,000 of income.

If you paid taxes to the U.K. on $100,842 in income, you wouldn't be able to claim a credit for these taxes since the income is excluded. If you earned more than this, then you would pro rate the taxes. For example if you earned twice this amount then you would get a credit for half the taxes paid. If the U.K. taxes turn out to be more than the U.S. taxes, the U.S. does not refund these excess taxes. Instead, you get a credit carryforward to the next five years. The carryforward credit will only help you in the succeeding years if the U.K. taxes become less than the U.S. taxes.

-- Posted: July 24, 2003