Diagnostic #403 - Form 2555 W-2 Withholding

Forum|Forum|6 years ago
March 2, 2020
1 reply
23 views

Receiving Diagnostic #403 - e-file: Form 2555 - Federal income tax or social security tax withholding cannot be greater than 1/2 of the wages on the W-2. Taxpayer's federal tax withholding exceeded 50% of W-2 wages. How can this diagnostic be cleared? Will it prevent e-filing the return?

Lacerte Tax

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itonewbie

Level 15

Is your client still legally employed by his/her US employer and seconded overseas for an assignment? If your client was transferred or locally employed, your client should have no W-2 while working overseas. Even if your client remained a legal employee of the US employer, exemption would normally be claimed for FIT, which means there would only be FICA withholding.

It would be highly unusual to have FIT exceed 50% of Box 1, particularly for someone who qualifies for foreign earned income exclusion and considered neither the withholding tables nor supplemental rate would get the FIT anywhere near that level.

Something is not adding up...

---------------------------------------------------------------------------------Still an AllStar

R

rcrAuthor

Level 2

Thanks for the reply. My client is legally employed by a US business, and qualifies for the foreign earned income exclusion. He chose to have a large portion of his W-2 income withheld for federal taxes to cover his tax liability on his other sources taxable income.

Any ideas on how to resolve so the return can be e-file?

itonewbie

Level 15

Then your client probably didn't complete the F.673 / W-4 correctly or payroll didn't understand how these should be read. It should be corrected for 2020 as it wouldn't make sense to have money kept by Uncle Sam without interest.

As for 2019, if you're comfortable that the return is correct as prepared, check the box to ignore the diagnostic and it may just go through.

---------------------------------------------------------------------------------Still an AllStar

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