# FEIE and FTC



## lat19n

For what seems like a month now (off and on) I have been going back and forth on whether we should file amended returns and claim the FEIE for the 3 years we possibly could. Today I very quickly completed a form 2555 and a form 1040X for 2017's return. I'm sure the forms I completed are riddled with mistakes but I wanted to ballpark it.

For the last 5 years we have lived outside the US we have never filed FEIE - BUT - every year I take the taxes that are withheld "at source" by our Mexican financial institutions and reported that as a FTC on the US return (while reporting to the US ALL of the interest income we have made in Mexico). 

Today I read that if you claim a FTC (unearned income) you can not claim a FEIE (earned income). Am I understanding that correctly ? Our FTC amounted to hundreds of dollars. A FEIE would have yielded us thousands.

At this point I almost think I might need a true tax professional to unravel this mess I have created. Or - as my wife says - hey we would have had to report all that earned income (and pay taxes on it) had we been living in the US anyway - maybe we should just let it all be.


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## Moulard

You definitely can use the FEIE exclusion on earned income and the FTC on passive income. 

Or you can use FTC on both passive and general income. But once you do that you cannot use the FEIE for 5 years.

Once you choose to exclude either foreign earned income or foreign housing costs, you cannot take a foreign tax credit for taxes on the income you exclude. Note carefully, that is only on the income you exclude, not all income.

From what you describe, perfectly acceptable to file a Passive Form 1116 for taxes withheld on bank interest and form 2555 on foreign earned income.


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## lat19n

Thank you.


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## lat19n

We are heading off on a few days of vacation, right into the path of Hurricane Bud, so I've printed off the instructions for forms 2555 and 1040X for a little light reading...

One thing that caught my eye was this paragraph :

"Foreign tax credit or deduction. A Form 1040X to claim or
change a foreign tax credit or deduction for foreign taxes
generally must be filed within 10 years from the due date for
filing the return (without regard to any extension of time to file)
for the year in which the foreign taxes were actually paid or
accrued. For details, see Pub. 514, Foreign Tax Credit for
Individuals. This extended period for filing Form 1040X applies
only to amounts affected by changes in your foreign tax credit or
deduction."

So if we wanted to file amended returns to claim FEIE we get to go back 3 years BUT if we want to file amended returns for FTC we get to go back 10 years ! Hardly seems fair. Am I reading that correctly ?


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## Windies

This is correct. Generally, because of the statute of limitations, you can't go back more than 3 years (nor can the IRS, again generally). This is one of those special cases where you are allowed an "extended period". So this is a good thing.

My understanding of the 5-year election prohibition for FEIE is that you can't change your choice *back *within 5-years (without permission of the IRS). If you have never used the FEIE you are not changing your choice back so you can elect to stop using the FTC for your foreign earned income and elect to use the FEIE going forward. Permission is given to change if your circumstances change significantly. For example, moving from Dubai with no income tax to Germany with significant income tax you might switch from exclusion to credit. If you then moved to the Cayman Islands with no income tax you would want to go back to the exclusion as you have to foreign tax and my understanding is the IRS would allow this, but you have to get their permission.


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## Moulard

lat19n said:


> So if we wanted to file amended returns to claim FEIE we get to go back 3 years BUT if we want to file amended returns for FTC we get to go back 10 years ! Hardly seems fair. Am I reading that correctly ?


Not reading it quite right. You can amend your tax return for 3 years. 

If you dispute a foreign tax bill, or get audited, and that changes the amount of foreign tax you actually paid or accrued, then you can amend that on your return to reflect the actual foreign tax credit you are eligible for. You can do this for up to 10 years because you can carryover excess foreign taxes paid for up to 10 years.

You would still be liable for the same amount in US taxes (as your income would not have changed) as a result of say a foreign tax court ruling. All that would change is the credit available for foreign taxes paid.


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