# Switching from FEIE to FTC



## Alltimegreat1

Hi. I've been filing the foreign-earned income exclusion the past few years. I heard recently that claiming the foreign tax credit might be a better option for me since taxes are higher here in Germany than in the US and I can get a $1,000 child tax credit. According to H&R Block, once a person switches from the FEIE to the FTC, it is nearly impossible to switch back to the FEIE in the next five years. hrblock.com/expat-tax-preparation/articles/foreign-earned-income-exclusion.html

The article doesn't mention specifically how difficult (if at all) it is to make the initial switch from the FEIE to the FTC. Anyone have experience/knowledge about this?


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## Bevdeforges

Take a look at IRS Publication 54: Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad It explains how to revoke the exclusion if that's what you want to do. Publication 54 (2014), Tax Guide for U.S. Citizens and Resident Aliens Abroad
Cheers,
Bev


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## Alltimegreat1

Bevdeforges said:


> Take a look at IRS Publication 54: It explains how to revoke the exclusion if that's what you want to do.
> Cheers,
> Bev


Thanks for the links! Revoking the exclusion for past years in favor of the foreign tax credit doesn't seem all that tedious. I wonder if the IRS would refund the money I paid them, which I would not have owed if I had claimed the FTC.


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## Bevdeforges

If you wound up paying to the IRS, then they should refund the money when you amend your returns. You can, however, claim the FTC only on the "unearned income" that falls outside of the FEIE. (It's a little bit tricky because you have to allocate your foreign tax between the earned and unearned portions - but it's stock standard practice for those who have taxes due after applying the FEIE.)
Cheers,
Bev


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## BBCWatcher

Yes, but only for tax year 2011 and subsequent, and only if your amended filing for tax year 2011 arrives at the IRS by April 15, 2015. (There's an argument you might be able to stretch the refund claim deadline to June 15 if you're careful, but I wouldn't risk it.)

Refunds are not recoverable more than 3 years after the original filing deadline for the tax return in question, hence this particular deadline. Tax years 2010 and prior are already refund history, as I write this.

Bev, I think Alltimegreat1 simply wants to revoke the FEIE completely for prior tax years. If that's done, the FTC is fully operable on that previously excluded income. Yes, there should be one Form 1116 filed per income category -- all in the instructions.

Collecting refundable tax credits is an excellent reason to skip the FEIE in many cases. Congratulations on apparently doing better than zero. Sometimes U.S. citizenship has its perks.

Another thing I should mention, Alltimegreat1, is that if you do end up with earned income in tax year 2014 not shielded with the FEIE, and you otherwise qualify, you're also now able to make a contribution to a U.S. tax-advantaged retirement savings account, notably a Roth IRA. You also have until April 15, 2015, to make an IRA contribution for tax year 2014.


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## Alltimegreat1

BBCWatcher said:


> Yes, but only for tax year 2011 and subsequent, and only if your amended filing for tax year 2011 arrives at the IRS by April 15, 2015. (There's an argument you might be able to stretch the refund claim deadline to June 15 if you're careful, but I wouldn't risk it.)
> 
> Refunds are not recoverable more than 3 years after the original filing deadline for the tax return in question, hence this particular deadline. Tax years 2010 and prior are already refund history, as I write this.
> 
> Bev, I think Alltimegreat1 simply wants to revoke the FEIE completely for prior tax years. If that's done, the FTC is fully operable on that previously excluded income. Yes, there should be one Form 1116 filed per income category -- all in the instructions.
> 
> Collecting refundable tax credits is an excellent reason to skip the FEIE in many cases. Congratulations on apparently doing better than zero. Sometimes U.S. citizenship has its perks.
> 
> Another thing I should mention, Alltimegreat1, is that if you do end up with earned income in tax year 2014 not shielded with the FEIE, and you otherwise qualify, you're also now able to make a contribution to a U.S. tax-advantaged retirement savings account, notably a Roth IRA. You also have until April 15, 2015, to make an IRA contribution for tax year 2014.


Thanks again for the ingsight to you both. I'm only looking to claim the FTC for 2013 and 2014 (already submitted the FEIE this year stupidly w/ a check). Let me explain briefly: I excluded my German earned income (less than $99,000) using the FEIE, but I had some returns on US investment funds and after all the exlusions I owed around $75. Are you saying that this counts as unearned income and is refundable if I revoke the FEIE for the FTC (because the excess of German taxes I paid would cover this amount)?


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## BBCWatcher

No, not quite.

The FTC is category-based. Earned income is separated from passive income, in particular. I'm assuming you already took the FTC on your passive income to account for the German income tax you paid (say, on some minor bank interest), so that $75 doesn't change.

If you revoke the FEIE and take only the FTC on your earned income, a few things happen. One is you become eligible for U.S. IRA contributions for tax year 2014, so you can start to shield those U.S. investments from U.S. tax going forward (assuming the U.S.-Germany tax treaty is friendly or at least respectful -- check that). Another is you qualify for refundable tax credits, notably the $1000 per U.S. citizen child Additional Child Tax Credit (though watch that income phase-out, especially if you're filing separately). And, on top of all that, if your German income tax on that income was higher than your hypothetical U.S. income tax on that income, you get to bank the excess FTC. You can then spend down that excess FTC in a future tax year on the same category of income, up to 10 years in the future.

In this case, since you'd presumably accumulate excess FTCs on the earned income category (income from work), it'll mean your first $XXXXX (some amount) of income from work in the U.S. will be free of U.S. income tax, because you can spend your excess FTCs. So if you spend a couple months in the U.S. working on a project, go there for a couple years on an assignment -- whatever -- you get a nice income tax savings. (You'll still owe payroll tax or self-employment tax, probably.) Yes, that's a speculative benefit, but it's still nice to have in the bank. The FEIE/Foreign Housing Exclusion doesn't let you accumulate excess credits from a comparatively high income tax jurisdiction.


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## Bevdeforges

I only mention the option because some people think you can only take one or the other - the FEIE OR the FTC, which simply isn't true. 

Take a look at what your situation is, because there are a number of factors to consider. Yes, you may pay more in "taxes" to Germany, however just be aware that only those taxes considered "income taxes" under a fairly strict definition of the term can be credited against US taxes using the FTC. 

Simple example: anything designated as "church taxes" cannot be credited under the FTC. There may be other taxes like that, so check before you refile. (Here in France the question comes up quite frequently as there are a number of "side taxes" collected as part of the income tax filing process.)
Cheers,
Bev


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## Bevdeforges

Alltimegreat1 said:


> Thanks again for the ingsight to you both. I'm only looking to claim the FTC for 2013 and 2014 (already submitted the FEIE this year stupidly w/ a check). Let me explain briefly: I excluded my German earned income (less than $99,000) using the FEIE, but I had some returns on US investment funds and after all the exlusions I owed around $75. Are you saying that this counts as unearned income and is refundable if I revoke the FEIE for the FTC (because the excess of German taxes I paid would cover this amount)?


That's what I thought you might be referring to. Forget about all the IRA stuff for the moment. You can certainly use the FEIE to avoid being double taxed on your earned income. Your investment income is NOT, however, considered earned income and thus you will only be able to offset any income taxes paid to Germany on that US investment income directly. 

Not sure about the US-German tax treaty, but chances are it gives the US "first rights" of taxing a US source of passive income like that. But there should be some "break" for you on your German tax forms if you have to report the US source income - either Germany should give you a credit or a deduction for the $75 in tax you paid on that income.
Cheers,
Bev


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## Alltimegreat1

I wasn't aware that an FEIE and FTC could be filed simultaneously. I've actually learned more about US taxes in the past 10 minutes than in the previous 10 years!

I've never claimed any FTC ever. I keep my money in Germany in a checking account of sorts (Girokonto), which doesn't pay any interest. Just the German income taxes alone (Einkommenssteuer) would be more than enough to offset the US taxes I would have owed. On top of that there is the solidarity surcharge (Solidaritätszuschlag) (aimed to support the East German economy), which is probably a gray area as concerns the IRS.


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## Alltimegreat1

Just thought I'd mention again how much I appreciate the support here. You guys really know your stuff. Now that I know that taxes I've paid to the IRS for returns on US investments cannot be offset by the FTC, I won't need to amend any returns for past years. Starting with the tax return for the year 2015 I will switch to the FTC to claim the $1,000 child tax credit (child born in 2015).


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## Bevdeforges

Alltimegreat1 said:


> Just thought I'd mention again how much I appreciate the support here. You guys really know your stuff. Now that I know that taxes I've paid to the IRS for returns on US investments cannot be offset by the FTC, I won't need to amend any returns for past years. Starting with the tax return for the year 2015 I will switch to the FTC to claim the $1,000 child tax credit (child born in 2015).


You may have misunderstood. The taxes you paid on your US investments may very well be offset-able (and thus refundable) but only if you declared and paid income tax on those investments on your German income tax form. (I used to live in Germany but can't remember whether you have to declare foreign source income on the declarations.)

You may want to take a look at the actual FTC forms for this year (form 1116) just to get an idea of what and how you need to handle things if you switch to the FTC for 2015 and going forward. If you revoke your FEIE option, you can't go back quickly if you find the FTC isn't working out the way you hoped, so doing a "dry run" with this year's forms might give you a bit more confidence when making the change next year. 
Cheers,
Bev


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## BBCWatcher

That "solidarity tax" is _probably_ an income tax for IRS FTC purposes. Italy has something similar, though it's only applied to incomes above 300,000 euro as I recall.

OK, about that U.S. investment income -- let's assume some stock dividends ($500 for sake of argument). First of all the U.S.-Germany tax treaty may have something to say about which government taxes that income. That's the first stop.

If the treaty is silent, then as a resident of Germany presumably you're taxed on worldwide income. So what'd end up happening is you'd pay the U.S. first (since it's U.S. source income). Let's assume then you have $75 in U.S. income tax on that $500 in dividend income. Then Germany gets its crack at taxing the same income, but Germany also presumably has its own foreign tax credit. Maybe Germany wants $125 out of that $500. However, you already paid $75 in U.S. tax, so you'd only owe Germany another $50.

Do you get to then bounce that $50 in German tax back onto your U.S. tax ledger as an excess Foreign Tax Credit in the passive income category, ping pong style? I don't think so, but maybe Bev has a view on that.


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## FFMralph

In Germany only Einkommensteuer and Solidäritätssteur can be claimed as income tax.


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