Expats, IRAs and FEIE

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Topic Author
BeaverFood
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Joined: Fri Jul 26, 2013 1:29 pm

Expats, IRAs and FEIE

Post by BeaverFood »

We are currently living abroad and confused about IRAs and the Foreign Earned Income Exclusion. We are a two income family, one of our incomes falls entirely under the FEIE and is not taxed. The other's income exceeds the FEIE limits and is taxable on a portion of the package. Can we contribute to traditional or ROTH IRAs in both our names (one as a spousal IRA since one of us doesn't have taxable income that exceeds the FEIE) or is only the person with income that exceeds the FEIE able to contribute to IRAs in their own name?
Spirit Rider
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Re: Expats, IRAs and FEIE

Post by Spirit Rider »

Both provided that the amount of the income for the person who exceeds the FEIE is sufficient to fund both contributions.
Topic Author
BeaverFood
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Re: Expats, IRAs and FEIE

Post by BeaverFood »

Spirit Rider wrote:Both provided that the amount of the income for the person who exceeds the FEIE is sufficient to fund both contributions.
Do you know where I can find info to support that claim? I was looking at the IRS pub on retirement accounts and it only talks about Spousal IRAs for a spouse with no income. The pubs on foreign earned income don't deal with retirement. I've done web search after web search on the topic and can't find what I'm looking for.

Your response, Spirit Rider, made me smile as that would open up a lot more tax advantaged retirement savings options for us...
Spirit Rider
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Re: Expats, IRAs and FEIE

Post by Spirit Rider »

I don't believe you will find any specific IRS info addressing these specifics. So my conclusion is based on the combination of the following.

You may contribute to IRAs provided your taxable compensation >= your IRA contribution. A spouse without/(without enough) taxable compensation may make a spousal contribution if their spouse's taxable compensation is >= to their combined contributions.

If you are using the FEIE, you may only make an IRA contribution to the degree that your net taxable compensation (gross - FEIE) >= your IRA contribution.

This is an oversimplified case as their are other modifications in tax filing that may impact the numbers.

Remember, this is the internet and IANAL. So no statement should be construed as anything other than an opinion, certainly not a 100% certainty. However, preview versions of 2013 tax software are available. You should be able to plug in very simple test cases to verify this.
Alan S.
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Re: Expats, IRAs and FEIE

Post by Alan S. »

Spirit Rider is correct.
Pub 590 is quite clear on this question:
1) Taxable compensation for IRA contribution purposes does not include income excluded under the FEIE or housing exclusions, but since one spouse has taxable compensation in excess of this exclusion, the excess income can fund an IRA contribution.
2) A Spousal contribution can be made for the lower earning spouse using income from the higher earner. The spouse whose taxable compensation exceeds the FEIE can therefore provide this excess taxable comp for the other lower earning spouse. In other words, the excess taxable comp of the higher earning spouse does not have to be applied to the remaining FEIE of the lower earning spouse, thereby converting this income to non taxable income for spousal contribution purposes. The way the spousal contribution is described in Pub 590 makes this clear.
Topic Author
BeaverFood
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Re: Expats, IRAs and FEIE

Post by BeaverFood »

Thank you both so much!
Red-y
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Re: Expats, IRAs and FEIE

Post by Red-y »

Here's another approach you might want to consider: don't use the FEIE but instead use Foreign Tax Credits to reduce or eliminate your US tax bill. Most countries have higher tax rates than the USA, despite the bellyaching you hear in America about high tax rates on individuals. It just isn't true.

Once you've mastered Form 1116 to claim the Foreign Tax Credits for what you've already paid in taxes on your wage income in the country where you are resident, it is actually simpler and faster to do your taxes compared to using Form 2555 to claim the Foreign Earned Income Exclusion.

Using FTCs to offset the US tax liability due on your foreign wages means that you both have taxable earned income and therefore the ability to contribute the max to IRAs each year.
Carl53
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Re: Expats, IRAs and FEIE

Post by Carl53 »

Red-y wrote:Here's another approach you might want to consider: don't use the FEIE but instead use Foreign Tax Credits to reduce or eliminate your US tax bill. Most countries have higher tax rates than the USA, despite the bellyaching you hear in America about high tax rates on individuals. It just isn't true.

Once you've mastered Form 1116 to claim the Foreign Tax Credits for what you've already paid in taxes on your wage income in the country where you are resident, it is actually simpler and faster to do your taxes compared to using Form 2555 to claim the Foreign Earned Income Exclusion.

Using FTCs to offset the US tax liability due on your foreign wages means that you both have taxable earned income and therefore the ability to contribute the max to IRAs each year.
This is a great suggestion. I looked into it a little bit more and found the following very well documented link and example.
http://americansabroad.org/files/3913/3 ... tadams.pdf
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Peculiar_Investor
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Re: Expats, IRAs and FEIE

Post by Peculiar_Investor »

In case you were not aware, there is a new wiki article under developement, Taxation as a US person living abroad - Bogleheads that might provide useful information. Discussion related to the article's development can be found in Wiki (?) - Investing as an expat (US citizen living abroad)
Normal people… believe that if it ain’t broke, don’t fix it. Engineers believe that if it ain’t broke, it doesn’t have enough features yet. – Scott Adams
Little Bird
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Re: Expats, IRAs and FEIE

Post by Little Bird »

I know this is an older thread, but had roughly the same question; just that my partner's income (and I'm talking about this year only) will not qualify for the FEIE (due to less than half year spent out of US) so am wondering if we could contribute into IRA for her and open spousal IRA for me using her income to qualify? (Next year both of us will be o/s and qualify for FEIE but will not have anything above so would not be able to invest in IRAs).
Thanks!
tj
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Re: Expats, IRAs and FEIE

Post by tj »

Carl53 wrote:
Red-y wrote:Here's another approach you might want to consider: don't use the FEIE but instead use Foreign Tax Credits to reduce or eliminate your US tax bill. Most countries have higher tax rates than the USA, despite the bellyaching you hear in America about high tax rates on individuals. It just isn't true.

Once you've mastered Form 1116 to claim the Foreign Tax Credits for what you've already paid in taxes on your wage income in the country where you are resident, it is actually simpler and faster to do your taxes compared to using Form 2555 to claim the Foreign Earned Income Exclusion.

Using FTCs to offset the US tax liability due on your foreign wages means that you both have taxable earned income and therefore the ability to contribute the max to IRAs each year.
This is a great suggestion. I looked into it a little bit more and found the following very well documented link and example.
http://americansabroad.org/files/3913/3 ... tadams.pdf
Unfortunately that's a dead link at this point. Would have been curious to read it.
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