Foreign Income Exclusion

Not exactly

1 - You can do this but it isn't to your advantage. The Foreign Income Exclusion is generally the worse election for individuals paying the Canadian Tax Rate. As Canadian Tax Rate exceeds the US Tax Rate, use the Foreign Tax Credit instead. You open up other credits to you.

2 - Her electing to be taxed as a US tax resident under IRC Section

6013(g) is made for that and all future tax years. She may not wish to do so.

[snip]

Section 6013(g) contains additional information on when the election does not apply and how it can be revoked. Below is the paragraph on how the election gets suspended. The next two paragraphs in the code informs one on how to revoke the election.

(3) Duration of election An election under this subsection shall apply to the taxable year for which made and to all subsequent taxable years until terminated under paragraph (4) or (5); except that any such election shall not apply for any taxable year if neither spouse is a citizen or resident of the United States at any time during such year.

It can't be worse than taking the FEIC. The actual foreign tax credit is the smaller of the US tax and Canadian tax on that income, so if the Canadian tax on 80k is 20k while US tax is 15k, the credit is limited to 15k. So it should be the same as the FEIC.

Also, the FEIC reduces AGI, so your tax rate/bracket will be lower, and possibly phaseouts will be less (though I imagine the rules for calculating some of the phaseouts might say to add back the FEIC). So it's possible that the FEIC is better. It would be worthwhile to do calculation on a tax program.

Third, is the Canadian tax the federal tax, or federal + provincial tax?

The statute does not say how to revoke the election. Do you have to send a letter to the IRS by 12/31 or something?

And what does the following cryptic paragraph mean? Which are the "any two individuals" that they refer to?

(6) Only one election If any election under this subsection for any two individuals is terminated under paragraph (4) or (5) for any taxable year, such two individuals shall be ineligible to make an election under this subsection for any subsequent taxable year.

Treasury Regulation § 1.6013-6(b)(1)

Reference is to the the husband and wife (see below). It says that once an election is terminated either because of revocation, death, legal separation or by order of the Sec'y of the Treasury, then these individuals are precluded from ever making another election.

(2) Individuals with respect to whom this subsection is in effect This subsection shall be in effect with respect to any individual who, at the close of the taxable year for which an election under this subsection was made, was a nonresident alien individual married to a citizen or resident of the United States, if both of them made such election to have the benefits of this subsection apply to them.

I was kind of wondering about just this issue - whether the FTC or FEIC is better. It seems like the FEIC is better. As was pointed out, it would leave the remaining income in a lower bracket, and not lead to various AGI-related phaseouts. The FEIC is more restrictive, because it requires that the individual be a resident of the foreign country for the entire tax year. It also applies only to earned income - which in my case is almost all of it, but might not be for someone else. Also it is limited while the FTC is unlimited, but again, my girlfriend's income just happens to be under the FEIC limit. I think though that you can take the FEIC and additionally apply the FTC to income not excluded.

But I'm not an expert - and it was precisely because of this that I posted to the group, looking for advice. I am going to try to run a pro-forma tax return in TurboTax as though we had been married and see what it comes up with. Except that TT doesn't seem to be complete yet, when I tried to do this, it said I couldn't complete form 2555 because they aren't available yet from the IRS.

Yo'd think so, but there is a problem which crops up once you have multiple years. An individual year appears to be identical when prepared with FTC and FEIC but, when you have multiple years or Refundable credits, the FTC wins hands down. Accordingly, I don't even bother trying a FEIC.