American Expat: Opt to pay 5,500 of tax to qualify for IRA?

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HKboggles
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American Expat: Opt to pay 5,500 of tax to qualify for IRA?

Post by HKboggles » Mon Jun 19, 2017 9:57 am

I was wondering whether it was worth it to pay 5,500 of taxes at the US 25% bracket (which would be about 900 USD) and exclude the rest so i can contribute to a ROTH IRA. I don't need to pay California taxes as I've been a non-resident for 6 years.

Currently living in Hong Kong and may stay here long-term, so looking for the best ways to save for retirement. Hong Kong has very low tax and I can actually exclude all my American taxes but I was thinking that if I just paid 5,500, I would be able to avoid the capital gains, and dividend taxes on my investments in the future, which may outweigh 900/year.

What do you think, is this worth doing? I will also be able to deduct the taxes I pay to America in Hong Kong, which will actually make the burden a bit less than 900/year. Looking to invest for at least 30 years.

Any advice would be greatly appreciated!

Thanks,
Kevin

Spirit Rider
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Re: American Expat: Opt to pay 5,500 of tax to qualify for IRA?

Post by Spirit Rider » Mon Jun 19, 2017 10:11 am

The foreign earned income exclusion is all or nothing. You can not select how much exclusion you want to apply. However, you can choose to use the housing exclusion or not in its entirety.

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HueyLD
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Re: American Expat: Opt to pay 5,500 of tax to qualify for IRA?

Post by HueyLD » Mon Jun 19, 2017 10:23 am

Will your foreign earned income for 2017 be greater than 102,100?

HKboggles
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Re: American Expat: Opt to pay 5,500 of tax to qualify for IRA?

Post by HKboggles » Mon Jun 19, 2017 10:58 am

Oh, understood now, it wont be over 102k.

Is there any other way to contribute to an IRA while overseas if you are making less than 102k?

Perhaps freelancing for 5,500 would work? Does freelance salary get excluded as well?

Spirit Rider
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Re: American Expat: Opt to pay 5,500 of tax to qualify for IRA?

Post by Spirit Rider » Mon Jun 19, 2017 2:21 pm

Self-employment income is included. See IRS Form 2555 and its instructions. Only the amounts of total income > $102K that are counted as compensation would qualify for an IRA.

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in_reality
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Re: American Expat: Opt to pay 5,500 of tax to qualify for IRA?

Post by in_reality » Tue Jun 20, 2017 6:13 am

HKboggles wrote:Oh, understood now, it wont be over 102k.

Is there any other way to contribute to an IRA while overseas if you are making less than 102k?

Perhaps freelancing for 5,500 would work? Does freelance salary get excluded as well?
You can choose to not exclude your all your income, and claim a credit for Hong Kong taxes. All that income will be taxable to the US so if the HK credit isn't more than the US liability, you'll do worse.

Freelance salary may be considered 'self-employment" income that you are required to pay:

see https://www.irs.gov/individuals/interna ... ing-abroad
Who Must Pay Self-Employment Tax?
If you are living abroad and you are a self-employed U.S. citizen or resident you generally are subject to the self-employment tax.
Effect of Foreign Earned Income Exclusion
You must take all of your self-employment income into account in figuring your net earnings from self-employment, even income that is exempt from income tax because of the foreign earned income exclusion.
So I think you should pay social security taxes on your self-employment income but you can't use that income to fund an IRA because you are excluding Hong Kong income under FEIE. AFAIK, you can't exclude some income (such as from your employer) under FEIE but not other income (such as self-employment income).

That is true as Hong Kong doesn't have a totalization agreement. Totalization agreements typically say you don't/can't pay social security taxes on self-employment (and other) income [even if you wanted to so as to meet the minimum number of credits for medicare]. It does depend on the agreement so if one has been made recently, look into it.

I believe the following applies for amounts over $400.
If you are self-employed, you are obligated to pay U.S. self-employment tax, which is both the employer's and employee's share of Social Security and Medicare taxes. This must be paid in addition to regular U.S. income tax, and you must file IRS Schedule C and Schedule SE with your tax return. The self-employment tax rate is 15.3% of net Schedule C income before any foreign income exclusion or foreign tax credits.
(that's from http://www.footprintsrecruiting.com/tea ... ips-expats)

madbrain
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Re: American Expat: Opt to pay 5,500 of tax to qualify for IRA?

Post by madbrain » Tue Jun 20, 2017 8:43 pm

It's not $5,500 of tax that you want, but $5,500 of taxable income.

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