# Cutting to chase...



## horseshoe846 (Feb 8, 2017)

So thoughts appreciated ...

- we do not take the foreign earned income exclusion - we pay everything to the US.
- I DO take the credit (?) for my wife's (Mexican) home office (last year I believe it was a flat $1500 USD).
- I DO take off the cost of our (Mexican) healthcare - since my wife is still the 'breadwinner'.

Comments ? - Thanks.


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## Moulard (Feb 3, 2017)

Your post is timely... I was just gathering my thoughts on when and why it might actually be better to revoke the foreign earned income exclusion.

In another thread I made a comment that I couldn't think of an instance off the top of my head where it was better to revoke the foreign earned income exclusion.

Then I went.. _hey... wait a sec... it might be better in MY circumstances. _

The reality is that is may well be easier to take the FEIE, but easier, better may not necessarily be the same thing. 

There is also the fact that once you revoke the FEIE you cannot take it again without a private letter ruling for 5 years. That means when you first revoke via an amended return, or simply file without attaching a 2555 you need to consider how much your circumstances are likely to change in the future.

I think the four biggest uncertainties purely from the perspective of earned income are likely to be:


Changes to US Tax Rates
Changes to Foreign Tax Rates
Changes in Exchange Rates
Changes in earned income (job changes, retirement etc)

But having mulled it about in my head a couple different reasons to consider revoking the FEIE that I could think of without too much pontificating


If you exclude all or most of your income, you may not be eligible for things like the earned income tax credit
If Foreign taxes are higher than US taxes, you can build up a foreign tax credit that could be used to offset future tax liabilities.
If you plan to return to the US and sponsor migration, you may want to report a higher income.

No doubt there are others.

There are other implications that may need to be considered.

1) AGI and Deductions

Your AGI goes up meaning the amount you can claim as itemised deductions goes down on medical and job related deductions. Depending on your income and expenses, it may mean that there is no point itemising. If it is still worth itemising, you at least can take the full value as you don't have to reduce the amount because of the exclusion.

2) AMT
You are more likely to have to consider the AMT. Probably not an issue if you are overseas, and you could exclude your entire earned income. If however you only exclude part of your income with the FEIE then without it you may get perilously close to having to consider Form 6251. 

You may not actually owe the AMT, but you may have to submit the 6251 to prove it.

If you do have to deal with Form 6251 then you need to consider carefully the implications on the AMT FTC simplified view. 

The AMT is currently 28% of the amount over the AMT exemption. A critical consideration is whether the foreign tax rate is over or under that amount and what that means for any foreign tax credits.


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## Bevdeforges (Nov 16, 2007)

There are other considerations, too.


What nationality are you and your wife?
Nature of your wife's work - employed (US or Mexican payroll), self-employed, etc.?
Is she paying US social security? And if so, does she "need" the credits to have her own SS benefits for retirement? Is she contributing to a 401K or IRA retirement plan? How long until she is eligible to retire? 
Assuming your itemized deductions (home office and health care costs) are greater than what you'd be allowed as the standard deduction, what is your tax bill to the US vs. what would it be if you simply excluded your salaries altogether?
Do you pay any income taxes to your country of residence? If so, more or less than your US obligation?
Any likelihood of your returning to the US in the future?
Any possibility that you would be sponsoring a close family member for immigration?
Are either of you eligible for the Earned Income Credit? (Do you claim it?)

It's not a simple decision and can depend both on your current circumstances and your hopes and plans, plus any unforeseen events that "could" happen to you.
Cheers,
Bev


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## horseshoe846 (Feb 8, 2017)

Thank you both for your input. I was actually more interested in the other two things I brought up - declaring the Mexican healthcare costs (which aren't really all that much) and the use of my wife's office in our Mexican home. I just did what felt like the right thing to do - but I didn't get an advice beforehand. 

As for the FEIE - this will probably be the last year my wife will be working (she is 65+). We have been here a few years now - and I think I can honestly say that (excluding the 8938s) if I were to hand you last year's return and another return from say 10 years ago - some of the numbers would be different but the forms would be very similar.

This past week I had two phone conversations with 'international tax preparers' to test the waters. I described our situation to the first guy and he said the very first thing he would do would be to file amended returns to TAKE the FEIE. We had a nice chat and I asked him to ballpark his fee to prepare this year's taxes - about $1000 USD.

The very first thing the second person asked was - do you take the FEIE - and she expressed relief that we didn't. I actually sent her last year's return (and an copy of the FBAR). Her fee - $800 USD.

I think I will be download TurboTax later today and just doing the same thing(s) I did last year.


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## Bevdeforges (Nov 16, 2007)

If you're playing by the rules for the home office and the medical expenses, there is no reason not to take them as you have been doing. Home office is tricky because you really do have to use the space exclusively for the home office. Medical expenses are medical expenses (though I think you still have to itemize to take them, and in total they have to exceed a certain percentage of your gross income). But as long as you played by the rules, there's no reason your returns should be questioned.

I've just officially retired and yes, that really does change your filings from overseas. (And definitely takes the FEIE vs. FTC question off the table.) Unless you've got huge financial holdings outside the US or something like that, TurboTax or TaxAct or any of the reasonable commercially available software packages should be perfectly adequate - and cost you less than $100 or so for the year. 
Cheers,
Bev


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## Moulard (Feb 3, 2017)

The rules around deductions are exactly the same regardless of whether you are within the United States or without it (as the legalese refers to to it).

The only type of deduction that might be difficult is donations to charities, as they have to be US registered charities to count.

Except for an amount equal to 10% i(or 7.5% if you are over 65) of your AGI, Medical expenses are deductible. That includes foreign health insurance, medical fees, prescriptions, travel to get to the medical clinic, parking, glasses, hearing aides etc.. 

So in short, think beyond just healthcare. Although health insurance is likely to be the big ticket item on that list.

Similar with Job related expenses. As Bev says, the US rules are that the home office space must be used exclusively for work for it to be deductible. But there are a bunch of other job related expenses that can be deducted too.

With job expenses, you cannot claim the first 2% of your AGI worth. 

I think its worth doing a dry run on Schedule A. Just to check to see if the total is more than the standard deduction. 

I find that it is relatively easy to take the work related deductions that I can claim on my Australian Taxes as a starting point and then fine tune to adjust the list to reflect US rules not Australian ones.

Its pretty easy to tally up the simple expenses and determine if is likely to end up above the AGI thresholds.


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