# US tax: tax reduction biggies



## boxmiks (Jun 17, 2020)

Hi,

I'm trying to figure out if I am missing any options to reduce my US taxes. Most of my income is from salary, however, I have some compensation that is not excludable as well as some non-earned income. I take a standard deduction and would struggle to find enough items to surpass it. I guess this probably covers a lot of expats with rather simple situations. The main ones I understand are:

1) FEIE, foreign tax credits or deductions to reduce double taxation. If your income is high enough, this also includes foreign housing deduction.

2) IRA. Requires non-excluded compensation and so may be limited if you take the FEIE. Also can not use for back-filing previous year's returns.

3) HSA. Doesn't require compensation, but the amount is smaller. Also can not use for back-filling previous year's returns.


In my case I am filling for previous years, so IRA and HSA don't help with my non-FEIE income. This is making a big difference in what I owe, so is there anything else I could use? I guess if I had self-employment income there would be a whole other host of things to consider.

thx!
michael


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## Bevdeforges (Nov 16, 2007)

Not sure what you mean by this: 


> Most of my income is from salary, however, I have some compensation that is not excludable as well as some non-earned income.


The FEIE is applicable only to "earned income" - which boils down to salary paid for work performed while you are physically outside the US. I assume the "compensation that is not excludable" is some sort of bonus payment considered "unearned" income. 
Non-earned income usually relates to investment income (bank interest, stock options or holdings, etc.).

As you say, IRA and HSA are generally out of consideration due to the need to show taxable earned income. And you can't use the FEIE for only part of your earned income.

But the Foreign Tax Credit can be applied to unearned income (particularly investment income) even if you have taken the FEIE on your salary. Depending on the tax rates involved, the FTC may or may not cover the US tax due, but it's probably worth running the numbers to check.

And actually, "self-employment" income is generally eligible for the FEIE thing - as long as you're not paying yourself an "exorbitant" salary that exceeds a "reasonable" salary for the time and effort you put into the business.


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## Moulard (Feb 3, 2017)

Expanding on the points that Bev makes..

You are right, the two primary tools you have to reduce your US tax burden are the FEIE and the FTC.

Neither method is a silver bullet on its own.

The FTC is only really works well on its own if the foreign tax rate is higher than the US federal rate. When nutting it out you have to account for the both US and foreign deductions etc that lower your real tax rate as well as distinguish marginal rate from the effective tax rate.

If the foreign tax rate on wages is lower than the US tax rate, the FEIE is more effective. But as Bev highlights, you cannot use it on interest, dividends or even that portion of your wages that forms a foreign pension contribution.

So even if you use the FEIE to exclude wages, you may need a FTC to reduce taxes on that portion of your income that you cannot exclude or deduct.

The housing deduction is of limited value.. firstly your housing expenses must exceed 16% of the FEIE limit.. and the deduction is capped at 30% of the limit unless you live in a city the IRS has defined as high cost. 

Hands down, the FEIE is definitely quicker and easier if your income is below the exclusion limit AND the sum of all of your other income is below the standard deduction.. but it comes with a trade off. With the FTC you can carry over excess foreign taxes above the US tax owed for up to 10 years. 
From a tax planning perspective that can be handy if you expect to have a foreign financial event in the future which would be US taxable... think for example distribution of a foreign pension that is tax free in your country of residence, but taxable by the US.

Turning your question on its head for a moment, while an IRA or HSA may be US tax beneficial, do bear in mind that it is highly likely that your country of residence will simply treat these accounts as ordinary trusts and you will get no foreign tax benefit from them.


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## boxmiks (Jun 17, 2020)

Thanks. Yes, pretty much. My FEIE ineligible compensation is from employer contributions to a non-qualified deferred retirement account, the Swiss pillar 2. The thing about this is that it is pre-tax money in Switzerland, so there is no tax to credit.


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## boxmiks (Jun 17, 2020)

Thanks Moulard. Yes, thinking about it from both countries tax policies really steps up the considerations. I haven't even tried to figure out the Swiss system.

I am mostly just wondering if I am missing something on my US taxes when I see all the deductions and exclusions on the forms. Since previously all my income was excluded, I am not self-employed and am single, I haven't needed to get into it too deeply.


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## Jca1 (Aug 7, 2019)

To be able to contribute to an HSA, you need to buy a US High Deductible Health Plan (HDHP) medical insurance policy. Basically this is a health plan with a large deductible (around $6500 for a single adult I think) accompanied by the HSA tax incentives to help you pay for medical care.

I don't know why you'd want an HDHP if you don't live in the US, I also don't know of one you'd be able to buy from outside the US, and any in case the premium alone would exceed your US tax savings from making the maximum HSA contribution.


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## 255 (Sep 8, 2018)

boxmiks -- Just to add reference an IRA. As you stated, there are limits on dates for contributing to an IRA, usually you can contribute during the calendar year thru tax filing time (usually April 15, but due to COVID-19, you actually have until July 15 to contribute for 2019.) The other issue, for an IRA, is your contribution can only be made based on "earned income," so if all your earned income is excluded by utilizing the FEIE -- you're not eligible to make a contribution. If you have earned income over the FEIE income limits (that is not excluded,) you can make a contribution, based on that income. Cheers, 255


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