# Living abroad, filing US taxes, few ?s



## johnny13 (Feb 13, 2012)

I'm a US citizen living abroad in Northern Europe with my non-US citizen wife and 2 children, both US citizens. Our combined income is $110,000, $80k of which is my earned income.

My income tax rate here abroad is 30%. 

My questions are as follows:

--When filing my taxes, should I claim the foreign tax credit or Foreign Earned Income Exclusion?

--I'd like to still contribute to an IRA, preferably a Roth IRA. I don't have any US income but I'd be willing to let gov't tax me on the $5500 even though I already paid taxes here in my resident country. Possible? 

--I paid $8000 in property taxes on a rental property I own and used to reside in as my primary residence in US and took a major loss, despite renting it out. Any help from good ol' Uncle Sam there?

--What's the quick and dirty here (but still legal) even if it means I "gift" my wife some of my income to circumvent any restrictions? 

Thanks a lot.


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## Bevdeforges (Nov 16, 2007)

Unfortunately, there are no real quick and dirty answers to your questions.



> --When filing my taxes, should I claim the foreign tax credit or Foreign Earned Income Exclusion?


You really need to run the numbers, using a couple of scenarios. The FEIE only applies to your "earned income" - not to any ancillary (unearned, or passive income, like interest, investment income, etc.). Also, if your wife is not subject to US taxation (non-resident alien) then you have to decide whether to file as "married, filing separately" (with or without taking your kids as your dependents/exemptions) or "married, filing jointly" in which case you'll have to report all her worldwide income in addition to your own, and get her an ITIN. 



> --I'd like to still contribute to an IRA, preferably a Roth IRA. I don't have any US income but I'd be willing to let gov't tax me on the $5500 even though I already paid taxes here in my resident country. Possible?


Not sure about the Roth, but generally speaking, whether or not you can contribute to an IRA may depend on what you decide about FEIE vs. FTC on your earned income.


> --I paid $8000 in property taxes on a rental property I own and used to reside in as my primary residence in US and took a major loss, despite renting it out. Any help from good ol' Uncle Sam there?


If you're renting it out, then you need to swami up the financial results on the rental income, taking the property taxes and depreciation and claiming your loss. The fact that you used to reside in the property probably won't really factor into the equation until and unless you sell the property. But check the IRS publication on rental property on that one.


> --What's the quick and dirty here (but still legal) even if it means I "gift" my wife some of my income to circumvent any restrictions?


You can gift assets, but I don't think you can gift income.
Cheers,
Bev


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## expatwien (Oct 17, 2015)

The same question was posted to an investment forum (bogleheads.org), where I suggested that he also post here. I responded there (similar but different in some details to Bev's response):

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You should work out both variations (FTC and FEIE), but it sounds like you should take the FTC. Get a tax program such as TaxAct to work out the details. The details (especially for FTC and AMT) are too complicated to work out by yourself.

If you take the FTC, and your children are under 17, you should qualify for the additional child tax credit as a refund ($1000 per child). You can also contribute to a Roth IRA, as your foreign earnings count toward your US adjusted gross income. File as a head of household (normally for unmarrieds, but with a non-US spouse you qualify). If you take the FEIE, your US adjusted gross income may be close to $0, and you can't get the additional child tax credit or contribute to a Roth IRA.

Apply for an extension until October now (before April 18). Otherwise, you get an automatic extension until June, which can't be extended further.

Also ask at
Expat Tax - Expat Forum For People Moving Overseas And Living Abroad

There are some very knowlegeable people there, who helped me in similar circumstances. They can provide more details than I have here.

I can't provide any information relative to your rental property.
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## BBCWatcher (Dec 28, 2012)

Yes, it's likely skipping the FEIE will make sense for you as a resident of Finland. Run the numbers both ways and see what happens.

I don't think you'll get the Additional Child Tax Credit as a _refundable_ tax credit due to income phaseouts applicable to Head of Household filing status, but I could be wrong. You should pick up some excess Foreign Tax Credits, though, if skipping the FEIE makes sense. So if you ever get some U.S. earned income -- maybe a few months working there -- those credits will come in handy.

If you don't expect your residence/tax situation to change much if at all when your kids are in college/graduate school then making more contributions to Coverdells (and 529s) probably doesn't make too much sense. Your future capital gains, dividends, interest, etc. could slide right into your personal exemption and standard deduction, get taxed at 0% (in the U.S. at least), and that'd be that. Finland is different than Singapore (where I live) in that respect. For me a 529 account is a reasonably safe gamble. It'd be more a gamble for you, I'd say. You can't do *worse* with a 529 if you actually use the money for qualified educational expenses, but you're locking in the money for that specific purpose. If you pull the money out in a non-qualified way then you pay the ordinary tax plus a penalty. So that's the gamble. Good gamble from Singapore, a bit riskier from Finland, I'd say.


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## johnny13 (Feb 13, 2012)

expatwien said:


> The same question was posted to an investment forum (bogleheads.org), where I suggested that he also post here. I responded there (similar but different in some details to Bev's response):
> 
> 
> ---------------------------------------


Yes I appreciate you showing me over here too for additional tips. Also been a good resource here for my ?s, however there appears to be mixed messages as to if I can contribute to my IRA if I'm not paying any US income taxes, which I'm not as I reside overseas and pay all income taxes to my resident country. Some are saying I can contribute, others are saying I definitely can not. As said, I'm happy .... errrr I mean I'm even willing to let the US tax me on my foreign income that I've already been taxed on by my resident country for the $5500 I'd like to contribute. 

I even spoke to a tax "pro" who apparently specializes in tax law for expats, was recommended and ended up being a total flake and was useless, not only when I asked him this question but a list of others as well. 

Just trying to get a clear answer to that one especially. I sincerely appreciate all of the feedback so far from you all! Cheers!


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## Bevdeforges (Nov 16, 2007)

On the IRA issue, apparently the deal is that you have to have income that is subject to US income tax - so no, if you take the FEIE you can't make an IRA contribution. (You can't take a partial FEIE - it's all or nothing. However, if you have 5500 over and above the FEIE limit, then you can contribute that to your IRA.) 

And apparently, if you waive taking the FEIE and cover your complete tax obligation with Foreign Tax Credit, then you can take the deduction for an IRA.

I would check IRS publication 590-A to be sure of what you can and can't take for contributions from overseas.
Cheers,
Bev


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## johnny13 (Feb 13, 2012)

Thanks, I'm actually taking the Foreign Tax Credit, not the FEIE. 

All these 6 years of living abroad here, I was taking FEIE where I always got nothing back and was unable to contribute to an IRA, when apparently I should have been taking the Foreign Tax Credit, where this year I'm going to get the $1000 credit for each of my 2 kids. In addition, I'm also able to contribute to the IRA this way. 

I'm just completing my taxes here where my adjusted gross income is $95,000 and my taxable income after deductions and exemptions is $66,000. And I can still contribute to my IRA and I get the 2 child credits. A no brainer for me to choose the Foreign Tax Credit.


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## BBCWatcher (Dec 28, 2012)

Agreed, Johnny. Skipping the FEIE is a good fit for you.

To contribute to a U.S. IRA there are two major requirements that must both be satisfied:

1. You need unexcluded earned income equal to or greater than the amount of your IRA contribution, i.e. you need U.S. taxable earned income. Whether that income is actually U.S. taxed or not is a separate question, but it doesn't have to be U.S. taxed.

2. Your income needs to be below the limit for the particular type of IRA. Note that a nondeductible Traditional IRA has no income limit, so that type should be available if you satisfy condition #1.

You can also contribute to a spouse's IRA, even for a nonworking spouse, as long as both #1 and #2 are true.

Finally, please note that U.S. IRAs are only U.S. tax advantaged. There is no such thing as a globally tax advantaged account. It's up to the foreign country where you live (and its tax treaty with the U.S., if there is one) to decide how to treat your U.S. IRAs. In some countries U.S. IRAs don't make much if any sense just for that reason (foreign taxation).


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## johnny13 (Feb 13, 2012)

BBCWatcher said:


> Agreed, Johnny. Skipping the FEIE is a good fit for you.


You've been a great help. Thank you very much! 

Why on earth would anyone use the FEIE and not the FTC? What's the incentive to not use the FTC? I'm just not grasping the concept, although I see that the FTC is clearly for me. $2000 and the ability to contribute to my IRA say so. 

And I guess a final question is can I go back and redo my taxes for the past couple of years so that I select the FTC instead of the FEIE so I can at least get the $1000 child credits? Any idea?


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## expatwien (Oct 17, 2015)

Yes, you can amend your tax returns for tax years 2013 and 2014, and take the FTC and claim relevant refunds. The statute of limitations for refunds for 2012 runs out April 15th (maybe April 18 this year - I don't know). You must revoke the election to take the FEIE for those years too. This revocation cannot be reversed until the 6th year after it has been revoked.

The FEIE has several possible advantages over the FTC:
1) It tends to be easier to fill out.
2) It lowers your tax bracket on US source income.
3) If your foreign tax is lower than your US tax and your income is lower than the limit for the FEIE, an exemption on your full income is better than a partial credit on your taxes due.


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## Bevdeforges (Nov 16, 2007)

johnny13 said:


> Why on earth would anyone use the FEIE and not the FTC? What's the incentive to not use the FTC? I'm just not grasping the concept, although I see that the FTC is clearly for me. $2000 and the ability to contribute to my IRA say so.


In another thread here, there is someone who is using the FTC to cover both earned and "unearned" income (i.e. salary and investment income). The FTC can go wrong in a case like this because of how you have to apportion your deductions and exemptions between the earned and unearned income (and possibly account separately for the foreign tax paid on the two separate categories of income).

Or, in a so-called "high tax" venue, if the base on which the taxes are calculated is significantly different enough that you don't have enough foreign tax to cover your US tax liability.

Or, for a US citizen married to an NRA where the income distribution between the husband and wife is significantly uneven so that the US citizen can't claim enough of a credit from the foreign taxes paid to cover their US tax liability.

There are lots of situations like these - which means you really do have to run the numbers for your particular circumstances. Neither option is always the best for everyone.
Cheers,
Bev


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