# Annuity and foreign earned income



## brianbruce88

Bonjour,
I am an American living in France where I have been a full time resident for the last fifteen years. I found out yesterday that I am the beneficiary of an annuity from my deceased father. I will be receiving $900.00 per month for the next 24 months.I have spent the entire morning on the phone to the IRS without finding anyone able to tell me how to declare this money and what percentage the money will be taxed. I have no other income outside of my foreign earned income. The paperwork involved in having this money wired to me asks me to choose if I wish to have a flat rate , or a percentage of this money withheld, or if I would like to have nothing withheld.
I can't figure out how to proceed.
I earn around $45,000 of foreign earned income a year and ,as such fall far short of the $95,000.00 exemption limit for expats.
Is the percentage on which I am to calculate this tax rate based on,
1-$45,000 exempt foreign income, plus the annuity ($10,800) in the 25% bracket
2-$10,800 annuity %15 bracket
The Annuity is from a qualified annuity (tax deferred) with a 1099R at the end of the year.
Please help as I am at a loss.
I tried to call the IRS at the consulate in Paris, but the its office is closed till the 3rd of December.


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## Bevdeforges

First of all, you want to look at IRS publication 575. (Downloadable or viewable online at the IRS website: Internal Revenue Service ) Annuities are a tricky area and the taxability of any annuity depends on the exact type of annuity.

As far as the Foreign Earned Income Exclusion goes (that's the $95K exclusion) - that only applies to "earned income" - i.e. your salary.

Now, how you determine your actual taxes if your annuity is taxable by the US - in very general terms, you fill out the first page of the form 1040, excluding your salary income as it says on the form 2555. Assuming you have no other source of income, this leaves you with and AGI (last line on the first page of the 1040) in the amount of your annuity payments.

From your AGI you then subtract your personal exemption (plus those for any dependents you can claim if you have any) and then subtract your standard deduction (unless you itemize, and if you do, things get a little more complicated). 

The net result is your taxable income - basically, this is the figure you wind up paying taxes on. But there is a worksheet in the instructions for the form 1040 that you should use to determine your actual taxes. Easier to work your way through the worksheet than to try to explain it here.
Cheers,
Bev


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## BonjourFrance

Hi Bevdeforges, I have a similar problem too and now reading all these I am so disappointed. I am an expat living in Europe and I have a small monthly pension. I also have some money in deferred annuities that I would like to take out little by little so I would not have to pay tax on it. I've always thought that for expats $95000 would total the max deduction for income either pension or/and annuities and I was counting on getting the distribution of annuities to make the difference between my little pension and the max $95000. I guess I'm wrong?
What to do? Thanks!


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## Bevdeforges

Neither your pension nor your annuities fall under the "earned income" that can be excluded with a form 2555.

Normally, the pension's taxable status depends on whether it's a private pension or a government pension (i.e. US social security). Government pensions are subject to taxation in the country they come from - usually. There are always a few exceptions. (The one I am most familiar with is Italy - where an Italian citizen drawing US Social Security is only taxed on it by the Italian government.)

The usual expectation is that if you are taxed in your country of residence, you then use the taxes paid as a credit against your US tax liability. They are attempting to avoid double taxation, not allow you the non-taxation of your retirement income.
Cheers,
Bev


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## BonjourFrance

What I thought was that any income will be taxed, but being an US expat the standard deduction of $95-97000 would apply to me too having the deferred annuities that I was referring to. So I do not benefit from this deduction, right? Thanks.


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## BonjourFrance

BBWatcher said: "That is, if you're among the vast majority of U.S. citizens living overseas that has earned income up to $97,600 and unearned income (e.g. interest on a bank account) within your personal exemption/standard deduction, you pay zero U.S. income tax even if the foreign tax rate is lower than the U.S. rate".

Does that mean, that interest on a bank account in US or deferred annuities are not taxed if the total is $97,600? Thanks


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## Bevdeforges

BonjourFrance said:


> BBWatcher said: "That is, if you're among the vast majority of U.S. citizens living overseas that has earned income up to $97,600 and unearned income (e.g. interest on a bank account) within your personal exemption/standard deduction, you pay zero U.S. income tax even if the foreign tax rate is lower than the U.S. rate".
> 
> Does that mean, that interest on a bank account in US or deferred annuities are not taxed if the total is $97,600? Thanks


No. Your "earned income" is subject to an exclusion of up to $97,600. Earned income is basically salary income.

Unearned income is subject to the personal exemption and standard deduction (which varies according to your filing status - single, over 65, married, etc.). Example, as a single person age 65 or older, your standard deduction for 2012 is $7500. You also get $3800 as your personal exemption. So, in total, if you have only "unearned income" to report (interest, pensions, etc.) you don't pay taxes until you have at least 7500 + 3800 = $11,300 in income. (Or rather, you won't pay tax on the first $11,300 in income.)
Cheers,
Bev


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## BonjourFrance

Thank you Bev.


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