Don't forget to check if you qualify for any tax treaty benefits! The high-tax kickout rules still apply, but sometimes tax treaties between the US and the foreign country have special provisions about how certain types of income are categorized or credited. For example, I have income from Canada and the US-Canada tax treaty has specific rules about pensions and social security that affected how I filled out my Form 1116. Might be worth looking into depending on which country your foreign income is coming from.

Just wanted to share my experience after dealing with a similar high-tax kickout situation last year. The key thing that helped me was creating a simple spreadsheet to track each source of foreign income separately before even touching Form 1116. I listed each type of income (interest, dividends, capital gains, etc.), the country it came from, the foreign tax paid, and calculated the effective foreign tax rate for each. This made it crystal clear which items needed to be "kicked out" to general category vs staying in passive. One thing I learned the hard way - make sure you're calculating the effective rate correctly. Don't just look at the statutory tax rate of the foreign country. You need to divide the actual foreign tax YOU paid by the actual foreign income YOU received. Sometimes withholding taxes, tax credits in the foreign country, or other adjustments can make your effective rate different from what you'd expect. Also, keep really good records of your calculations because if the IRS questions your categorization later, you'll want to be able to show exactly how you determined which income belonged in which category.

You might want to consider filing Form 8379 (Injured Spouse Allocation) if you're married filing jointly and your spouse has student loans that could possibly be in default. This form, which I believe could help in certain situations, essentially tells the IRS that part of the refund belongs to you and shouldn't be offset for your spouse's debts. It's perhaps worth noting that the processing time might be longer, possibly 11-14 weeks instead of the usual 3-4 weeks, but it could potentially protect your portion of the refund if there are any student loan issues that might appear later.

Based on my experience dealing with Treasury offsets, if you're showing $0 on the offset hotline right now, you're very likely safe for this tax season. However, I'd recommend double-checking a few things to be absolutely certain: First, confirm with your loan servicer that your student loans aren't actually in default status (270+ days delinquent). If you're making payments, in forbearance, or on an income-driven repayment plan, they typically can't offset your refund even if you're behind. Second, the timing matters - if you just filed recently, there's a small window where an offset could be submitted after you checked. But given that you're doing gig work and really need this refund, I'd suggest calling that Treasury number one more time about a week before you expect your refund to be processed, just for extra peace of mind. The vast majority of the time, no offset showing means no offset taken. Good luck! 🤞

Just to add another perspective - I was in a similar situation last year (US resident who moved abroad and then took a retirement distribution). One thing to be aware of is that you may be subject to additional reporting requirements beyond just the 1040 and figuring out how to report the 1042-S income. If you had financial accounts outside the US that exceeded $10,000 at any point, you might need to file an FBAR (FinCEN Form 114). And depending on your total assets abroad, you might also need Form 8938. These have serious penalties if you miss them.

Slight tangent but worth mentioning - when you file as a dual-status taxpayer, be aware that you generally can't file jointly with a spouse, you're limited on which deductions/credits you can claim, and you have to use the standard deduction (itemizing isn't allowed). Also, foreign tax credits work differently.

Has anyone tried using TurboTax to fix this issue? My employer also included my MBA tuition on my W-2, but I was able to exclude it on my tax return using TurboTax's deduction finder. It asked specific questions about my education and determined I could exclude it as a working condition fringe benefit. I'm just nervous about getting audited.

I went through something very similar as a registered nurse pursuing my BSN while working at a hospital. The IRS distinction between "maintaining/improving current job skills" vs "qualifying for a new profession" can be tricky with nursing education. For your NP program, you'll want to focus on how the advanced coursework enhances your current nursing practice - things like pathophysiology, pharmacology, and assessment skills that make you a better RN even if you don't immediately transition to an NP role. If your hospital has a clinical ladder or specialty certifications that benefit from advanced nursing knowledge, document that connection. The questionnaire you mentioned probably asked whether the degree qualifies you for a "new trade or business." The key is how you frame it - emphasize that it's advanced nursing education that improves your current nursing skills, not preparation for a completely different career. Even if you plan to become an NP later, if the coursework enhances your current RN duties, it can still qualify. Don't give up on getting this corrected. Consider escalating beyond your immediate HR contact or requesting a written explanation of their policy. Sometimes a different HR representative will have better understanding of the tax rules.

I'm dealing with a similar situation at my company right now! My employer has been doing this "we'll pay your taxes as a benefit" thing for the past 6 months, and I've been getting increasingly worried about it. After reading through all these responses, I'm definitely going to bring this up with HR tomorrow. It sounds like even though my boss thinks they're doing something nice for us, they're actually creating potential problems. The point about this being considered additional taxable income is especially concerning - I had no idea about that. Has anyone here had success getting their employer to switch back to normal withholding mid-year? I'm wondering if there are any complications with changing the withholding system partway through the tax year, or if it's pretty straightforward to fix.

I went through something very similar with my previous employer about two years ago. What really helped me was documenting everything - I kept copies of all my pay stubs showing zero state tax withholding and any emails or conversations with my boss about this arrangement. When I finally got it resolved (after talking to the state tax department), I learned that Illinois specifically requires employers to withhold state income tax from employee wages. There's no legal exception for employers to "pay it later as a benefit." Your boss might think they're being helpful, but they're actually putting both of you at risk for penalties. The good news is that this is fixable! I'd recommend approaching your boss with the information others have shared here about Illinois withholding requirements. Most small business owners genuinely don't know the rules and are willing to correct it once they understand the compliance issues. If they push back, having documentation from the state tax authority (like others mentioned getting through Claimyr) can be really persuasive. Don't wait too long to address this though - the longer it goes on, the more complicated your tax situation becomes. You've got this!