# FEIE: line 44 taxes higher!



## japanusaexpat (Jan 25, 2017)

Hi all,

I am trying to file by myself online for 2016, but am having some confusion, so I hope someone can please help :hippie:

For 2016, here's my relevant situation in a nutshell:

Filing as single with no dependents, US citizen.
Japan income of $11K from 2016/1 - 2016/2. Income tax, unemployment insurance, medical insurance, residence tax was withheld from paycheck.
Moved back to US in 2016/3 permanently (but may move to foreign country a few years later again).
US income for rest of 2016.
Paid municipal taxes of $3K to Japan in 2016/7. This was due for the period of 2015/6 - 2016/5 (Japan has a system where you pay taxes for the prior year).

I input everything into my online software, used the FEIE, and printed my return. However, what I saw on the "Foreign Earned Income Tax Worksheet - Line 44" shocked me. Basically what happened was:

TU = Tax on US income only = Tax on US income using 2016 IRS tax tables
TA = Tax on all income = Tax on US income + Japan income ($11K)
TP = Tax on Japan income = Tax on Japan income ($11K) = $1,190 using 2016 IRS tax tables
TD = Tax due to IRS = TA - TP

Now my concern is that TD is significantly higher than TU, which is what I would have paid if I never had any foreign income and claimed the FEIE in the first place. Is this right??

If that is right, would it better to take the FTC this year? It looks like the FTC credit will save me $3K in taxes, whereas the FEIE would only save $1,190.
Do the Japan municipal taxes (住民税) qualify for the FTC?


Thank you for reading this and please let me know your thoughts!


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## japanusaexpat (Jan 25, 2017)

I also found this: When Should I Utilize The Foreign Tax Credit and When Should I Take The Foreign Earned Income Exclusion? (Form 1116 vs Form 2555)


> One final point to consider regarding the foreign earned income exclusion is that once a taxpayer decides to take the exclusion, and then does not take it in a subsequent year, they are barred from taking it for the following 5 years.





> One is only barred from taking the foreign earned income exclusion for 5 years if they take it in one year, and then have foreign earned income in a future year and then opt to not claim the foreign earned income exclusion even though they are eligible to take it.


For 2014 and 2015, my tax returns have both form 1116 (FTC) and 2555 (FEIE) attached, but am not sure which one I used for those years.
I'm a bit worried whether I should use the FTC or not now. :fingerscrossed:
If I took the FTC for 2016 and move back overseas for work in 2018, then this means I can't use the FEIE for 2018 and am forced to use the FTC, which could make me have to pay more taxes to US if the destination country has lower taxes??


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## Moulard (Feb 3, 2017)

The FEITW applies your top marginal rate on the non-excluded income. 

So if your total income was $50k USD made up of 11k from Japan and 39k from the US, using the FETW you end up paying tax on the 39k that you cannot exclude at the 50k rate.

As opposed to simply paying tax on the 39k at the 39k rate.

On your second question...
If you itemise you should be able to deduct your municipal taxes on schedule A - on line 6 if they are the equivalent of property / real estate taxes.


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## japanusaexpat (Jan 25, 2017)

Thank you for clarifying that Moulard!

I am using the standard deduction of $6.3K for 2016, so itemizing won't help here, but thanks for that tip!
Is using the FTC possible here? Seems like it will save me >$1500 if I can use it!


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## Moulard (Feb 3, 2017)

japanusaexpat said:


> For 2014 and 2015, my tax returns have both form 1116 (FTC) and 2555 (FEIE) attached, but am not sure which one I used for those years.
> I'm a bit worried whether I should use the FTC or not now. :fingerscrossed:
> If I took the FTC for 2016 and move back overseas for work in 2018, then this means I can't use the FEIE for 2018 and am forced to use the FTC, which could make me have to pay more taxes to US if the destination country has lower taxes??


That doesn't sound right (your previous returns that is)

Unless you had foreign earned income excess of the exclusion limit (USD 100,300 in 2016) , or you paid foreign taxes on passive income then you probably should not have been filing both 2555 and 1116 in previous years.

If Japanese tax rates are lower than US ones, then it will likely be more efficient to use the foreign earned income exclusion. If tax rates are higher than US ones then it may be more efficient to take a foreign tax credit. But doing so comes at a cost...

If you do not use the form 2555 when you are eligible to do so, you are revoking that choice and cannot use it again for 5 years (without getting a private letter ruling)


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## Moulard (Feb 3, 2017)

I just had a thought. I think you have made an important mistake....

When you are referring to line 44... are referring to Form 2555 Line 44 by any chance?

If you are... that might be your problem. Read the instructions carefully. They are not well written.

On Form 2555 Line 44 you enter deductions allowed in figuring your adjusted gross income 
(Form 1040, line 37) i.e. the amounts of 1040 Lines 23 through 36 that are related to your gross income... NOT the amounts from 1040 lines 40 or 42. 

the FEITW doesn't have 44 lines... It only has about 8 lines.

If you enter your standard deduction here then will end up paying unneccesary tax. Line 44 is there so you don't double count things that impact your AGI.


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## japanusaexpat (Jan 25, 2017)

Moulard, thanks for helping!
No, I meant line 44 on the 1040, which was computed with the FEITW.

Oh, I didn't earn more than 100,300 USD in any year or had passive income, so maybe I'm just confused about my 2014/2015 returns were done, but seems it is not relevant given your point below:



Moulard said:


> If Japanese tax rates are lower than US ones, then it will likely be more efficient to use the foreign earned income exclusion. If tax rates are higher than US ones then it may be more efficient to take a foreign tax credit. But doing so comes at a cost...
> 
> If you do not use the form 2555 when you are eligible to do so, you are revoking that choice and cannot use it again for 5 years (without getting a private letter ruling)


:jaw:
Japanese income + municipal tax rates are much lower than the US, so I don't think the FTC would ever be better than an FEIE for a year someone works/lives in Japan fully.

The way I read this is that if I used the FTC for 2016, then I cannot use the FEIE for years 2017-2021 and would have to use the FTC if I had foreign earned income in Japan, which would end up in me paying more taxes to the US every year. Right?

So if I have Japan foreign income again before 2021, I can only use the FEIE by doing one of the below:
1. Get a "private letter ruling"
2. Amend my 2016 return to use the FEIE

How hard are these two?


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## Moulard (Feb 3, 2017)

> The way I read this is that if I used the FTC for 2016, then I cannot use the FEIE for years 2017-2021 and would have to use the FTC if I had foreign earned income in Japan, which would end up in me paying more taxes to the US every year. Right?


Correct. If you have foreign earned income and do not file a form 2555 when you are eligible to do so, you are deemed by the IRS to have revoked the choice to do so. 




> So if I have Japan foreign income again before 2021, I can only use the FEIE by doing one of the below:
> 1. Get a "private letter ruling"
> 2. Amend my 2016 return to use the FEIE
> 
> How hard are these two?


Without professional advice specifically related to your circumstances, Hard. 
And you have to pay for it too. 
So it isn't something to do lightly.



so.. why will it generally be better to exclude...

As an example... lets say Japanese taxes are 10% and US taxes are 15% and you had USD 10,000 in foreign income.

The taxes you paid in Japan are 1,000 but the taxes you owe in the US are 1,500.

If you try to use a foreign tax credit you only get a credit of 1,000 but will still owe the US 500 because of the higher US tax rate on that income.

The FEIE is actually a special kind of foreign tax credit because it reduces your gross income, it also reduces you taxable income and thus the tax you pay. 

Until very recently.. effectively you would have paid tax on your income as if you hadn't received that 10,000 and thus it acted like a 1,500 tax credit.


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## japanusaexpat (Jan 25, 2017)

I think I understand it fully now!

Sounds like using the FEIE rather than the FTC for 2016 is better given that there is a good chance I'll move back to Japan within a few years and any tax money I save now will cause me to be hit with more tax bills later.
I'll sleep on this and reply back if I change my mind.

Thank you again!!


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## Bevdeforges (Nov 16, 2007)

I see you have your answer, but just let me add a couple of points:

If you use the FTC, you can only count income taxes paid to a foreign country. Municipal taxes are NOT considered as part of the FTC calculations.

And with the FTC, you don't actually get a dollar for dollar (or yen for dollar) credit. There is (always) an allocation process involved that attempts to render your tax credit based on the proportion of your income you paid in taxes to a foreign government.

There is, of course, also the consideration about that 5 year waiting period if you "revoke" your option to take the FEIE by using the FTC only. 
Cheers,
Bev


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## japanusaexpat (Jan 25, 2017)

Thanks for clarifying it, Bev!

In this case, I'm certain that I'll take the FEIE for 2016 and will remember this info about the FTC for years to come!


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