# Claiming FEIE and FTS concurrently



## Alltimegreat1

Some people have posted that the Foreign Earned Income Exlcusion (FEIE) and the Foreign Tax Credit (FTC) can both be claimed in the same year. I'm confused as to how that would work and what advantages (or possible drawbacks) this might have. In what situation would claiming both be beneficial?


----------



## BBCWatcher

There are two basic situations when individuals claim both the FEIE (along with its companion the Foreign Housing Exclusion) and the Foreign Tax Credit:

1. When they have both foreign taxed earned income and foreign taxed passive income (interest, dividends, capital gains, etc.) The FEIE, as its name implies, only applies to earned income -- income from work. Wages, salaries, tips, etc. The FTC applies to all forms of income incurring foreign income tax. So it's very common for individuals to take the FEIE and the FTC, at practically every income level.

2. When they have earned income above the FEIE/FHE limits. Well compensated individuals can still take the FTC on the portion of their foreign taxed earned income above their FEIE/FHE limits. Plus, of course, the FTC on foreign taxed passive income.

In both cases the FTC still applies -- or at least could apply. (If you don't have any foreign income taxed passive income, the FTC doesn't apply to Case #1.) The major question then is whether it makes sense to take the FEIE/FHE or not. If the foreign income tax rate is higher than or equal to the hypothetical U.S. rate on that income, the answer is no, it doesn't make sense to take the FEIE/FHE and one should preferably rely on the FTC exclusively.

Note that taking the FEIE/FHE in Case #1 wipes out U.S. taxable earned income, and that means you cannot contribute to U.S. IRAs and cannot qualify for the Additional Child Tax Credit (and perhaps other refundable tax credits).

Case #2 is a very nice situation, if you're so fortunate. You get a lower income tax rate on your first portion of earned income, and you shield that from U.S. income tax with the FEIE/FHE, so that's a tax savings. (You probably wouldn't take the FEIE/FHE unless your foreign rate was lower.) You might still qualify for certain tax credits, though that depends on your Adjusted Gross Income quite often. (You might earn "too much," but that's what they call a "happy problem" to have.) You can make U.S. IRA contributions because you have earned income above the FEIE/FHE, though you might have to restrict those contributions to a non-deductible Traditional IRA (which has no income limit), then (if you wish) roll over that Traditional IRA to a Roth IRA.


----------



## Bevdeforges

Just one caveat on the idea of taking the FTC instead of the FEIE for your earned income: AMT (Alternative Minimum Tax). They've adjusted the thresholds for the AMT in recent years, but the threshold is still less than the FEIE limit.

This page from the IRS gives you a bit of guidance regarding when and if you may be subject to the AMT: Alternative Minimum Tax (AMT) Assistant for Individuals
Cheers,
Bev


----------



## Alltimegreat1

So if I'm below the FEIE threshold then I won't need to worry about the Alternative Minimum Tax (AMT) if claiming the Foreign Tax Credit?


----------



## Bevdeforges

Alltimegreat1 said:


> So if I'm below the FEIE threshold then I won't need to worry about the Alternative Minimum Tax (AMT) if claiming the Foreign Tax Credit?


Kind of the other way around. If you only take the FEIE, no worries. But if you take the FTC - either instead of, or with the FEIE - it becomes more likely you may fall under the AMT. Best bet is to check the IRS site and that AMT wizard thing they have set up.
Cheers,
Bev


----------



## BBCWatcher

The AMT is part of one's "hypothetical" U.S. income tax rate I was describing above.

Since we have inexpensive (or even free) tax preparation software, simply run a simulation to decide which path is best. From what you describe about your particular circumstances I'd be surprised if you do better taking the FEIE in tax year 2015, but just run the numbers.


----------



## Alltimegreat1

BBCWatcher said:


> The AMT is part of one's "hypothetical" U.S. income tax rate I was describing above.
> 
> Since we have inexpensive (or even free) tax preparation software, simply run a simulation to decide which path is best. From what you describe about your particular circumstances I'd be surprised if you do better taking the FEIE in tax year 2015, but just run the numbers.


Thanks. What free software would you recommend? Are there any out there that can deal with FEIE/FTC, AMT, NRA spouses, foreign parental leave pay, etc.? I didn't find TurboTax to be very user-friendly once it got down to the foreign stuff.


----------



## Bevdeforges

TurboTax fell off the list of software for expats a year or two ago. Not sure exactly what the problem was, but this is the list being given out by the IRS office in Paris: http://photos.state.gov/libraries/france/5/irs/efiling.pdf

Foreign parental leave - or any other foreign benefits won't be dealt with in any US tax software. But check publication 525 on the IRS website. Around about page 27 or so it mentions "welfare and public assistance benefits" and if you can categorize your parental leave as a form of public assistance, you may be pleasantly surprised.

Personally, I've found TaxAct to be reasonably "expat friendly" - and if you go directly to the TaxAct website (i.e. not through the IRS free-file portal) you can download the software for free. Even if you upgrade it to the paying version (you get more assistance if you do), the price is pretty reasonable compared to the other standards.
Cheers,
Bev


----------



## Alltimegreat1

Just read the passage on page 27: "Do not include in your income governmental benefit payments from a public welfare fund based upon need, such as payments due to blindness."

It's frustrating that there's no specific mention of parental leave pay, which in my case will be provided solely by a German government agency (Elterngeldstelle). One would assume that these payments are not declarable, but I'm wary of assuming when dealing with the IRS. The "based upon need" part leaves much room for interpretation. Do you reckon someone at the IRS hotline would know the answer to this?


----------



## Bevdeforges

Personally, I would avoid the IRS hotline at all costs. There have been storied in the press about how understaffed and undertrained the IRS is. And frankly, the folks back in the US have no idea about European (or other "foreign") benefits payments.

OTOH, I don't believe the governments here report anything back to the IRS about government payments you receive from them. I'd just assume your parental leave counts as "public assistance" and leave it off. The chances of them having any knowledge of it (or what it is, for that matter) is next to 0. 
Cheers,
Bev


----------



## FFMralph

Parental leave (Elternauszeit) payments are made by the employer. Not the German government. This could be excluded as foreign earned income. Child money (Kindergeld) is paid by the German government and cannot be excluded as foreign earned income. It is not considered a welfare payment (here) because everyone with children living at home and within Germany qualify for the payment. This needs to be reported as Other Income.

Here a section of an Army website offering information about US taxes while living in a foreign environment.
"The NRA taxpayer should be aware that certain items of income that are not taxable in the home country are subject to taxation in the U.S., for instance unemployment compensation, sick pay, and child benefits (Kindergeld), will be fully taxable in the U.S."


----------



## Alltimegreat1

Bev, that sounds like good advice. I guess I was worried they'd see that my income for the year is about half of what it normally is and that this would raise suspicion and potentially lead to further investigation.


----------



## Alltimegreat1

FFMralph said:


> Parental leave (Elternauszeit) payments are made by the employer. Not the German government. This could be excluded as foreign earned income. Child money (Kindergeld) is paid by the German government and cannot be excluded as foreign earned income. It is not considered a welfare payment (here) because everyone with children living at home and within Germany qualify for the payment. This needs to be reported as Other Income.
> 
> Here a section of an Army website offering information about US taxes while living in a foreign environment.
> "The NRA taxpayer should be aware that certain items of income that are not taxable in the home country are subject to taxation in the U.S., for instance unemployment compensation, sick pay, and child benefits (Kindergeld), will be fully taxable in the U.S."


Thanks for the post. I think you may be confusing Mutterschutzgeld with Elterngeld. Mutterschutzgeld is received by mothers starting 6 weeks before birth and ending 8 weeks after. The employer pays some of that. Elterngeld, by contrast, is paid exclusively by the German government.


----------



## Alltimegreat1

I think this should answer the question about Kindergeld. The IRS changed their policy in 2011. German Kindergeld is not taxable or reportable on US returns. I assume this applies to all US citizens and not only military servicemen. It is interesting however that US Military websites are the only ones providing any information on this topic.

http://www.eur.army.mil/21TSC/SJA/LegalAssist/Areas-Taxes/Kindergeld.pdf

The link kindly posted by FFMRalph seems to have been written before that, when a different rule was in place.


----------



## Bevdeforges

Thanks for sharing that, Alltimegreat1. I have also found all sorts of conflicting advice regarding foreign unemployment benefits. In all the IRS information they state pretty clearly that state and federal unemployment benefits are taxable income. But nowhere do they mention foreign unemployment benefits.

Some sources claim that they are not taxable (and not reportable) due to the fact that the employee usually pays part or all of the "premiums" for unemployment insurance. (Unlike in the US, where the government unemployment taxes are paid only by the employer.) 

When it comes right down to it, the IRS doesn't really have a clue about the various forms of public assistance available outside the US (and frankly, the original intent of Congress when they were passing the tax laws never would have considered them either).
Cheers,
Bev


----------

