Readers of this group will recall ad nauseum my questions about tax treatment for a foreign spouse. Well we did get married and she is a U.S. legal resident and I'm actually trying to prepare a return.
I did hire an accountant, but in one of our first conversations we had an issue, not in an angry way, a mutually respectful way, so let me ask about that issue and others.
Basic fact: My wife lives and works in Canada, was there for the entire tax year, and clearly qualifies as a foreign resident under the bona fide test. She has no US income.
The issue I had with the accountant was that he said her mortgage interest and property taxes are not deductible. I looked at a number of sources including IRS Pub. 936, and found no reference whatsoever to it not being deductible. The accountant said that because her income from Canada would be excluded, we would in effect be deducting her interest/property taxes against my USA income, and the IRS would not allow that. I do recall some examples in publications pertaining to the FTC and FEIE that showed expenses related to producing foreign income where the expenses were not deductable on the US tax return because the income was not taxable here. But those would seem to have nothing to do with a primary residence. IRS would never take the position that ownership of a primary residence is an element of producing income, else people would deduct all their housing expenses! Also, one has nothing to do with the other really - if one spouse owns a home but has no income, and the other has income but doesn't own a home, the deductible homeownership expenses are still deductible to the couple.
The accountant seemed to somewhat grudingly agree with me, and said he is going to look for a specific citation, but he ended our conversation implying that I shouldn't hire him, because if he prepared the return he would have to attach a statement that the return takes a position he doesn't agree with, and that's obviously the last thing I need. Especially when I think my position is 100% reasonable. What do you folks think?
Moving beyond that, the other issues are deductibility of provincial income taxes, RSP contributions (same as our IRA here), and contributions she makes to her pension plan (she is a government employee and has a defined benefit plan to which she must contribute). I would be interested in opinions, but I suspect that:
a) While provincial income taxes are fundamentally the same as state income taxes, "fundamentally the same" don't cut it with the IRS. Publication 17 says that "Foreign Income Taxes" are deductible, but I know you can't take the foreign tax credit and deduct the taxes also, and you can't double-dip if you are taking the foreign earned income exclusion. I would LIKE to say that the federal income tax to Canada is what's affected by the FTC/FEIE, and the provincial income taxes are deductible like state income taxes - but I think I'm SOL here.
b) I likewise doubt that her contributions to her pension plan are deductible/excludeable. But maybe somebody knows better.
Thanks in advance.