# Filing taxes



## LC3622 (Jan 8, 2014)

I have not filed taxes with the US government and want to become compliant as soon as possible. As I do not think I owe any significant amount of taxes to the US government, I have decided to use a "streamlined filing procedures" and want to file everything before 15 June deadline. I have started working on the forms and my understanding is that under the streamlined filing procedures, I have to file for 2013 and for three prior years 2010, 2011 and 2012 and FBARs for six years. Please correct me if I am wrong.

For 2013, everything is very clear. My gross income was slightly below the FEIE amount of $97,600, therefore I used FEIE exclusion and do not have any taxable income. However, I also had a few thousands bucks from different overseas bank accounts. I understand this interest goes on Line 8, but cannot be deducted with FEIE as it is a passive income. How do I treat this? As the amount of the taxable interest is lower than the amount of a personal exemption of $6,100, can I use a personal exemption if I elect to use FEIE? 

In one of the previous years, however, I estimate my income to be a bit above a FEIE threshold for that year. I also have a few thousand bucks in interest. What are my options? If I do not elect foreign tax credit (line 47), I end up with about USD 900 in unpaid tax. Am I allowed to take foreign tax credit if I already elected to use form 2555EZ?

My employer also participates in the pension plan and pays 8-10% of the salary into the fund (the concept of this is similar to 401k). I have not used any of those funds yet - how do I report such contributions? To me, this is not an income because I have not used it and can only access if I leave the company, etc? Do i need to report this?

In terms of filing, I need to file 1040, schedule B (interest details), 2555 and FBARs? Anything else?

Many thanks for your advice.


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## Bevdeforges (Nov 16, 2007)

There is nothing wrong with taking both the FEIE and the FTC - as long as you don't take both on the same income.

So for the year that the FEIE eliminates all your salary, you just wind up with the amount of interest coming down to the last line on the first page of the 1040 - this is your AGI. Turn the page and you then subtract the Standard Deduction and your personal exemption from your interest - and if everything comes down to $0 (or a negative figure), you're all set.

Someone more familiar with the Canadian retirement funds will have to help on that issue.
Cheers,
Bev


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## LC3622 (Jan 8, 2014)

Bevdeforges said:


> There is nothing wrong with taking both the FEIE and the FTC - as long as you don't take both on the same income.
> 
> So for the year that the FEIE eliminates all your salary, you just wind up with the amount of interest coming down to the last line on the first page of the 1040 - this is your AGI. Turn the page and you then subtract the Standard Deduction and your personal exemption from your interest - and if everything comes down to $0 (or a negative figure), you're all set.
> 
> ...


Thank you. What do you mean by saying "on the same income"?


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## BBCWatcher (Dec 28, 2012)

You have two choices:

1. Take the Foreign Tax Credit on all your income.

2. Take the Foreign Earned Income Exclusion on your earned income, then take the Foreign Tax Credit on your earned income (if any) above the FEIE limit and also take the FTC on other income.

If Option #1 results in a zero U.S. tax liability, it's generally preferred. The reason is you can apply excess FTCs to other tax years, so it's to your advantage.


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## Bevdeforges (Nov 16, 2007)

Short caveat to what BBCWatcher has said - what's "preferred" will depend on your specific situation. Even in a "high tax country" it's possible that your Foreign Tax Credit may come nowhere near covering what the IRS wants from you. And that is based on the very different sets of allowances, exemptions and deductions, plus the different methods of calculating taxes due in each particular tax system. The other thing to remember is that your personal exemption and standard deduction generally eliminate any US tax on at least another $10,000 of "unearned" income. So, if you're only nominally over the FEIE amount, that can be the fast and easy way to avoid paying Uncle anything at all.

Best solution is to run the numbers both ways. (Not that difficult to do if you're using tax preparation software.) 
Cheers,
Bev


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## Vangrrl (Aug 23, 2011)

I first exclude my salary using the foreign income exclusion and the apply the foreign tax credit against what's leftover (in my case some dividend income). 

I don't report my pension fund. I figure that once I start drawing from it then I will report it as income. No idea what the correct thing to do is but I take a "report and file in good faith with a healthy dose of common sense" approach to all matters IRS.

The one form that you didn't mention is form 8891 (I think that's the number) which deals with RRSPs. Make sure you fill that out if applicable.


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## BBCWatcher (Dec 28, 2012)

BBCWatcher said:


> If Option #1 results in a zero U.S. tax liability, it's generally preferred.


This is a correct statement. The situation(s) you're describing, Bev, are when the predicate is not true.

Getting to zero is nice, but _getting to better than zero is even better_. Ask General Electric.  The reason the FTC-only approach is generally preferred if your U.S. tax liability ends up being zero (in that tax year) is because excess FTCs can be applied to offset any U.S. taxes owed in future tax years, and because not taking the FEIE opens up access to refundable tax credits and IRA contributions. These are very nice attributes.

For example, one could easily imagine an individual working in a comparatively high tax jurisdiction and then retiring, cashing out various investments. If she took the FEIE she'd have to pay U.S. taxes in her retirement right away. If she didn't take the FEIE and instead racked up excess FTCs, she could end up paying zero U.S. tax for as many as the first 10 years of her retirement. Big difference! (Plus she'd be much more easily eligible to contribute to IRAs during her working career to avoid further U.S. taxes.)

Unfortunately I see many tax accountants just automatically taking the FEIE to save themselves some work. Ah, no -- that's just lazy and sloppy when done to individuals who live in comparatively high tax jurisdictions. And I'm on a bit of a war path when it comes to that sloppiness because it was done to me -- or more likely done to my employer since I was tax equalized at the time. You're exactly right that in the age of tax preparation software running the calculation both ways is not hard and not particularly time consuming, and it should be done _if you live in a comparatively high tax jurisdiction_. Sometimes the FTC-only approach will pay great dividends (like the hypothetical example above), and other times it won't.


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## Bevdeforges (Nov 16, 2007)

BBCWatcher said:


> This is a correct statement. The situation(s) you're describing, Bev, are when the predicate is not true.


Not to get picky about this, but your "predicate" was



> If Option #1 results in a zero U.S. tax liability, it's generally preferred. The reason is you can apply excess FTCs to other tax years, so it's to your advantage.


If your Option #1 results in your foreign tax credits exceeding your US tax liability, then yes, by all means, take the FTC and "bank" the excess credits. But if the foreign tax credits merely reduce your liability to zero, with nothing left over to "bank", I don't think you've really gained anything.

But like I said, run the numbers and see how it turns out. I just happen to be in a "high tax jurisdiction" but our income tax assessment comes no where near covering what my US taxes would be if I didn't take the FEIE. (And remember it's only income taxes that can be taken against US income tax.) I suppose it has to do with how the taxes here are calculated and what items are and aren't taxable here.
Cheers,
Bev


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## BBCWatcher (Dec 28, 2012)

Bevdeforges said:


> But if the foreign tax credits merely reduce your liability to zero, with nothing left over to "bank", I don't think you've really gained anything.


Isn't it mathematically improbable that the FTC-only approach lands you precisely at zero without excess? It's highly unlikely for one's total foreign income tax burden to _exactly_ (to the dollar) offset your U.S. tax liability. Chances are it'll either be over or under.

However, even at precisely 100% offset, the FTC-only approach can still be extremely valuable because qualified U.S. IRA contributions are otherwise difficult or impossible with the FEIE. And actually if the FTC-only approach is a "few dollars" short of zeroing out your U.S. tax it might still be favored for this sole reason. This is also situational. It depends in large part on where you live (and future tax rates) when you making U.S. qualified withdrawals from IRAs.

In the above two paragraphs I'm lumping refundable tax credits into the (net) U.S. tax owed.


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## LC3622 (Jan 8, 2014)

Vangrrl said:


> I first exclude my salary using the foreign income exclusion and the apply the foreign tax credit against what's leftover (in my case some dividend income).
> 
> I don't report my pension fund. I figure that once I start drawing from it then I will report it as income. No idea what the correct thing to do is but I take a "report and file in good faith with a healthy dose of common sense" approach to all matters IRS.
> 
> The one form that you didn't mention is form 8891 (I think that's the number) which deals with RRSPs. Make sure you fill that out if applicable.



My pension plan is not in Canada, so I do not need to fill out form 8891. However, I agree with your approach to report pension fund proceeds once you draw it. That is my understanding as well; yet, the tax code is not very clear.


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## BBCWatcher (Dec 28, 2012)

Could be IRS Form 8621 instead. In fact the IRS isn't necessarily happy if you only report foreign pension fund proceeds upon withdrawal. The key acronym here is "PFIC."


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## LC3622 (Jan 8, 2014)

BBCWatcher said:


> Could be IRS Form 8621 instead. In fact the IRS isn't necessarily happy if you only report foreign pension fund proceeds upon withdrawal. The key acronym here is "PFIC."


Why should I report on the income tax returns form for a particular year something which I have not received or have no access to? My employer makes certain contributions to the pension plan which I can withdraw either when I leave the company or retire. This is not an income. My logic - I withdraw, then it becomes my income, and I report. Why isn't this correct?


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## BBCWatcher (Dec 28, 2012)

It may not be correct. It depends on the nature of the account, its holdings, and whether a tax treaty with the U.S. applies. I would recommend reading up on the acronym I mentioned (PFIC).


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