# U.S. Tax return - Turbo tax



## Aminuk2014

Hello all - I am using turbo tax. Living in UK 2nd year. Used Accountant last year. I have entered all Income and Foreign earned income deduct. I owe no US tax. Can I stop now and file? I did buy a house in UK so I have mortgage interest and property tax I can deduct too but would I get a refund against the UK tax I paid? I do not think so. There are no QnA answers on Turbo tax for expats.


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## Bevdeforges

If you've eliminated all your taxable income through whatever means (usually FEIE or FTC or both), there's really no point in trying to deduct mortgage interest and whatever.

The only way you'd get a refund against UK taxes is if your UK tax forms allow you to deduct such things. You might need someone more familiar with UK taxes to help you. (Or check to see if TurboTax has a UK tax version. I seem to remember that they do.)
Cheers,
Bev


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## Aminuk2014

*US Taxes - Turbo tax*

Hello All - I just finished using Turbotax. Between the Foreign earned income credit plus the standard deduction with two kids we were within the limits so did not have to pay tax. If you are close then it looks like you can deduct mortgage interest, property tax anc charitable contributions. Before you spend hours trying to collect that info, try without them first. I just estimated them but then did not need it. We also had rental property and an S Corp with two state returns, no trouble with turbo tax. I did not file yet. I like to sleep on it. I need to find the average exchange rate, I just estimated, hopefully I am close enough.


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## byline

Aminuk2014 said:


> I need to find the average exchange rate, I just estimated, hopefully I am close enough.


Here's the IRS's foreign currency converter table: https://www.irs.gov/Individuals/International-Taxpayers/Yearly-Average-Currency-Exchange-Rates


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## Stargazer

People with kids might want to consider using the Foreign Tax Credit instead of the FEIE because it qualifies you for the Additional Child Tax Credit. Owing $0 is great, receiving money from them is better.


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## BBCWatcher

Documented U.S. citizen children if you're a U.S. person living overseas. Stargazer makes a very important point. Moreover, even if you don't have one or more such children it still might make sense to skip the Foreign Earned Income Exclusion if you live in a comparatively high tax jurisdiction. That way you would accumulate excess Foreign Tax Credits, and those excess credits are valuable.


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## Bevdeforges

One small caveat is to run the numbers before you decide. You may actually pay less tax in a "high tax jurisdiction" depending on how taxes are calculated there. Remember, too, that the FTC has to be taken on the same kind of income (i.e. "earned income" vs. "passive" income) and that taking the FTC after having taken the FEIE may affect your ability to take the FEIE in future years.

It's definitely a case of "your mileage may vary."
Cheers,
Bev


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## Aminuk2014

If I owe no tax does it matter which way I go, foreign earned income or foreign tax credit. I have two American citizen kiddos. Posted IRS exchange rate is 1USD = .681£


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## Bevdeforges

Aminuk2014 said:


> If I owe no tax does it matter which way I go, foreign earned income or foreign tax credit. I have two American citizen kiddos. Posted IRS exchange rate is 1USD = .681£


It depends. The FEIE is the quick and dirty way to go. If you use the foreign tax credit exclusively, you may be able to roll over any "excess" tax credit (i.e. if you paid more in foreign income tax than you would have done in US income tax) and there's the possibility of claiming those child tax credits. But the child tax credit is limited according to your declared income. (And filing simply to claim those refundable credits can elevate your standing on the IRS radar - though probably not if you're in the income range to be receiving the whole credit.)
Cheers,
Bev


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## theOAP

Aminuk2014 said:


> I did buy a house in UK so I have mortgage interest *and property tax *I can deduct.


I'm intrigued, what is this 'property tax'? I'm not aware of anyone paying property tax in the UK.

According to the IRS, UK 'rates' (Council Tax) do not qualify as a property tax. See Publication 54, page 35. Rates (the Council Tax) are levied on the occupant, not the owner.

It's semantics and if the return is not red flagged or audited you may get away with it, but it's very thin ice.


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## Aminuk2014

*UK Council Tax*

Thank you for the clarification. In my eyes it is paying for the same thing Property Tax in the US pays for so I assumed the same. I did not need the deduction though. The FEI and the standard deduction took care of all our UK earned income. Zero owed the US. It will be much easier and faster next year. I will post how much if any Turbo Tax charged me once I file. I am waiting a few more days just in case someone has another suggestion.


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## Stargazer

I like doing the Foreign Tax Credit because I get $2000 a year back from the IRS, generally. Also, doing it that way means the US considers us to have US income (not sure how this works exactly) which means we are eligible to contribute to Roth IRAs. Also, the excess foreign tax credits may come in handy, for example, we are going to be moving our Canadian retirement fund gradually out of Canada and I may need those carryover credits depending. Finally, as someone said, the FEIE is only going to exclude earned income so if you ever need to pay tax on investment income, you would need to do foreign tax credits anyway. 

It is a little harder, however, I paid an expat accountant to teach me how to do it, and it is easily accomplished on TurboTax.


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## BBCWatcher

Stargazer said:


> Also, doing it that way means the US considers us to have US income (not sure how this works exactly) which means we are eligible to contribute to Roth IRAs.


You (or your spouse) need U.S. taxable (not necessarily taxed) earned income in order to contribute to a U.S. IRA. It doesn't have to be U.S. source income.


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## Stargazer

BBCWatcher said:


> You (or your spouse) need U.S. taxable (not necessarily taxed) earned income in order to contribute to a U.S. IRA. It doesn't have to be U.S. source income.


Right. Taking the foreign tax credit qualifies when excluding doesn't. On the same foreign income.


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## BBCWatcher

Stargazer said:


> Right. Taking the foreign tax credit qualifies when excluding doesn't. On the same foreign income.


Correct.

There are those lucky few who earn above the Foreign Earned Income and Foreign Housing Exclusion limits, who take those exclusions, and who still qualify to contribute to an IRA (at least to a nondeductible Traditional IRA). There are also those who have both U.S. taxable and foreign excluded earned income who can still contribute. So the FEIE is not a "hard stop" against IRA contributions in every case.

That said, bravo. $2000/year in free money plus a Roth IRA is a great deal.


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## Stargazer

BBCWatcher said:


> Correct.
> 
> There are those lucky few who earn above the Foreign Earned Income and Foreign Housing Exclusion limits, who take those exclusions, and who still qualify to contribute to an IRA (at least to a nondeductible Traditional IRA). There are also those who have both U.S. taxable and foreign excluded earned income who can still contribute. So the FEIE is not a "hard stop" against IRA contributions in every case.
> 
> That said, bravo. $2000/year in free money plus a Roth IRA is a great deal.


I can see that. We don't make more than the FEIE excludes so just easier to apply the foreign tax credits to everything. I am happy about the Roths, Canada allows us to have Roths sitting in the US, however if we were to contribute to them, Canada considers them taxable from that point. Annoying. Our plan is to gradually take our RRSPs out of Canada and use that money to fund Roths. Also do the employer pension plan at my husband's job. Hopefully this will work out!


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## BBCWatcher

Stargazer said:


> I am happy about the Roths, Canada allows us to have Roths sitting in the US, however if we were to contribute to them, Canada considers them taxable from that point. Annoying. Our plan is to gradually take our RRSPs out of Canada and use that money to fund Roths.


I'm not sure I follow this. First of all I wouldn't drain RRSPs. They're perfectly fine on the U.S. side since they're tax deferred. Second, Roth contributions are always post-tax. True, your U.S. tax bracket is zero, but the fact your Canadian tax bracket isn't is still OK. It's just a different government collecting tax before you make your Roth contribution, that's all. I'd be inclined to max out both if you can and get some tax diversification that way.


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## Stargazer

BBCWatcher said:


> I'm not sure I follow this. First of all I wouldn't drain RRSPs. They're perfectly fine on the U.S. side since they're tax deferred. Second, Roth contributions are always post-tax. True, your U.S. tax bracket is zero, but the fact your Canadian tax bracket isn't is still OK. It's just a different government collecting tax before you make your Roth contribution, that's all. I'd be inclined to max out both if you can and get some tax diversification that way.


This link sums up most of my thinking, https://transitionfinancial.com/moving-to-usa/investment-services/moving-your-rrsp-rrif/ even though we're moving to the UK not back to the US. 

There is also the fact that the larger the RRSP grows, the more tax that needs to be paid in the UK and US. In the UK, there will be taxes on the gains as they _don't see it as tax sheltered_. The capital gains exclusion should cover it for now, but maybe wouldn't the larger it gets. On the US side, the US will tax the gains the RRSP has made since a person has become a non-resident of Canada but not the contributions. 

The UK-Canada tax treaty says we can take periodic RRSP payments out of Canada while paying_ 0% to Canada_. We will then pay little or no tax to the UK. We will have to report it to the US but as it will be considered general income, may have enough foreign tax credits to cover what they would tax. 

And then the money sits in Roth IRAs, which don't have to be reported to the IRS, have lower investment fees, and will not be taxed by the US nor the UK. The whole process will take 15 years though, so meanwhile it is still sitting and growing some in Canada.


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## BBCWatcher

Stargazer said:


> On the US side, the US will tax the gains the RRSP has made since a person has become a non-resident of Canada but not the contributions.


Will it? If there are U.K. taxes then wouldn't they be creditable or deductible on your U.S. tax return -- or at least part of your cost basis?

The fact is there is no such thing as a globally tax-advantaged account. It doesn't exist. Since it doesn't exist, the best you can do if you're crossing borders is play "all sides" in a sensible, prudent sort of way. OK, so a RRSP is (a) Canadian tax-advantaged; (b) partially U.S. tax-advantaged (tax deferred); (c) not U.K. tax-advantaged. The "worst" is (c). Aren't you going to be saving for retirement _anyway_? So why not take the _chance_ that you'll pick up some tax advantages? If you don't, OK, so be it. You're still no worse off than saving outside any tax-advantaged accounts.

Let it ride, I'd say. The RRSP isn't doing any harm. It isn't any _worse_ than ordinary savings, and it might do better.


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## Stargazer

BBCWatcher said:


> Will it? If there are U.K. taxes then wouldn't they be creditable or deductible on your U.S. tax return -- or at least part of your cost basis?
> 
> The fact is there is no such thing as a globally tax-advantaged account. It doesn't exist. Since it doesn't exist, the best you can do if you're crossing borders is play "all sides" in a sensible, prudent sort of way. OK, so a RRSP is (a) Canadian tax-advantaged; (b) partially U.S. tax-advantaged (tax deferred); (c) not U.K. tax-advantaged. The "worst" is (c). Aren't you going to be saving for retirement _anyway_? So why not take the _chance_ that you'll pick up some tax advantages? If you don't, OK, so be it. You're still no worse off than saving outside any tax-advantaged accounts.
> 
> Let it ride, I'd say. The RRSP isn't doing any harm. It isn't any _worse_ than ordinary savings, and it might do better.


Yes I would get some foreign tax credits on any taxes paid to the UK, but the larger the RRSP grows after we are non-resident, the more taxes the US will want and the greater the chance the foreign tax credits won't be enough to cover it. 

Problem is, it will be difficult to fund Roths without the RRSP money and I'd rather have Roths than RRSPs. Especially since we can get the RRSPs gradually out while paying so little tax. Suppose we are living in the US at retirement age. The US-Canada tax treaty currently says we can have periodic foreign pension payments taxed at 15%. Canada to the UK is 0%.


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## Stargazer

This is from Serbinski US-Canada tax forums, 

"the longer you hold your RRSP, every penny of it gets taxed at 25% and all the growth after coming to US gets taxed AT LEAST 25% (more like 40% after credits)."

Not sure if that's true but if so, that's not good.


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## BBCWatcher

If you _have_ to tap RRSPs to get Roths funded, and if that makes financial sense, OK. But that'd be the very last asset source to tap, presumably.

Conceivably you could optimize your RRSP holdings for foreign tax purposes. In particular, if they're low dividend/high capital gain assets, I assume that'd work.


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## Stargazer

BBCWatcher said:


> If you _have_ to tap RRSPs to get Roths funded, and if that makes financial sense, OK. But that'd be the very last asset source to tap, presumably.
> 
> Conceivably you could optimize your RRSP holdings for foreign tax purposes. In particular, if they're low dividend/high capital gain assets, I assume that'd work.


That sounds beyond me! I also have to think of the future. I handle all of the finances for our family, if I die before my husband, I want to keep things as simple as possible for him, given our expat life. Even if I outlive him, will I have the capacity to handle multiple retirement accounts and tax implications in different countries when I'm in my 80s and 90s? Two countries is enough, I want to get our assets out of the third.


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## Stargazer

Sorry to hijack the OP's thread, but there is one more thing I dislike about RRSPs. They pass tax-free in Canada to a spouse at death, however if passed on to anyone else, they are heavily taxed. So that can really affect inheritance to grown children. 

But I appreciate the pushback BBCwatcher as this is a big decision and I want to make a wise one for the long-term.


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## BBCWatcher

_In general_ tax diversification is a very reasonable strategy, just as portfolio diversification is. Multinational corporations do it, and certainly "multinational" individuals can and probably should, too. Part of the reason for diversification is that today's tax policies can and often do change at any time. That said, if you have specific reasons to de-diversify -- if that makes sense -- OK, so be it.


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