# FEIE or FTC or both? and Good reasons for not doing taxes



## Kaia

After having vowed to get my financial house in order in 2012, it's turning out to be 2013, but this time I WILL get 3 years of back taxes + the current year turned in!
I have two questions:
1) My salary is considerably below the threshold for the FEIE, so my earnings are not taxed. However, my interest income is below the threshold for German taxes. Can I use the FTC (paid on my salary) to exempt my interest income (which is tax-free in Germany)?

2) I'm not sure whether to do the streamlined thing or some form of noisy disclosure. Either way, as I understand, I need to give a reason why I haven't filed tax returns up til now. The usual reason given (along the lines of "I have only recently become aware that I'm required to file a return") would be lying. I've known all along that I should be filing and just haven't done it. (I hadn't expected to owe anything.) But that won't really fly with the IRS, I fear. Should I just leave out the reason for non-filing so far?

Thanks,
Kaia


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## Bevdeforges

Depending on just how much interest income you have, you may not need to pay any US tax on the income. But in general, no, you can't use German taxes paid on your (excluded) salary income to shelter your interest income.

Take a look at the 1040 form. Once you have excluded your salary income, all you have left as "adjusted gross income" should be your interest income. From that you then subtract first your Standard Deduction - which varies based on your filing status, but is a minimum of $5950 (for single or married filing separately) - and then your exemptions - minimum of another $3800 if you're single. That's almost $10,000 in interest income that is basically free of tax. 

If you've got more than $10,000 in tax free interest, I'd love to know where you're banking! <g>

If you just file your current year's return, the assumption will be made that this is the first year that your income exceeded the filing threshold, unless there is something on your return to indicate that you have been remiss in filing in previous years. If you want to play it safe, then file the current year and three years back with a cover letter stating that you only just became aware of the filing requirement. (LOTS of folks believe that you don't have to file from overseas if you don't owe anything.)
Cheers,
Bev


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## BBCWatcher

Kaia said:


> 1) My salary is considerably below the threshold for the FEIE, so my earnings are not taxed. However, my interest income is below the threshold for German taxes. Can I use the FTC (paid on my salary) to exempt my interest income (which is tax-free in Germany)?


The short answer is no. If all your income from work is shielded from U.S. tax using the FEIE, then you have no Foreign Tax Credit on that income. And if there's no FTC there and if you haven't paid any foreign income tax on your unearned income (bank interest in your case), there's no FTC to apply anywhere.

However, you still have a personal exemption, and Germany is a relatively high tax jurisdiction. Try calculating your U.S. taxes both with and without the FEIE. (Without the FEIE you would use the FTC.) You'll probably discover the tax owed is still zero or, in the latter case (FTC instead of FEIE), possibly even better than zero (i.e. you become eligible for one or more refundable tax credits depending on your income level and circumstances). Note that excess FTC amounts can be carried forward several years and backward one or a couple years -- how many years depends on the tax year(s) involved.

Note also that one other side benefit of using the FTC for everything is that you would become eligible to make a U.S. Roth IRA contribution. That'd be nice.

Anyway, run your taxes both ways (with and without FEIE) and see what results you get. Then choose the path that works best in your circumstances.



> Should I just leave out the reason for non-filing so far?


If you have a zero (or better than zero) result when you run your tax calculations, there's not actually any penalty for late filing (or even not filing) your U.S. tax returns. The IRS only penalizes a subset of individuals that legally owe unpaid tax. The FBARs are a problem, though -- you should offer a reasonable, truthful explanation for why you're filing your FBARs late since you were/are legally required to file those if you meet the threshold. (And you're supposed to file the last 6 years' worth of FBARs plus this year's if you're delinquent.)


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## Kaia

*Thanks!*

Bev and BBCWatcher,

You were right! I owe nothing, my interest income is more than covered by the standard deduction and personal exemption. (Thus, alas, I have no banking secrets to share with you, Bev!)
I finished 2012 yesterday and will put it in the mail today. Am I correct in assuming that I don't have to turn in anything besides the forms 1049 and 2225-EZ (i.e. no 1099, no substitute for W-4 and no list of interest income from foreign sources, since Schedule B doesn't apply)? All I need to do is keep the paperwork on hand in case of an audit?

Regarding the FBARs: I actually didn't know about them until last year, turned in 2011 in June of 2012, with a truthful explanatory letter and the promise to get the back forms in. That I do need to get taken care of as the next item on the agenda and as I get the FBARs sorted out, I'll file taxes for 2009-2011.

Thanks so much for the encouragement. You have no idea how much mental anguish just evaporated into thin air!

Kaia


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## Bevdeforges

Some folks would advise adding a Schedule B to your filing - just to check the box at the bottom admitting that you have a total of $10,000 or more in foreign bank accounts. (You don't have to list your interest income on the form if it's less than the threshold level.) But I have yet to hear of anyone who has been fined or even cautioned for not bothering. 

But no, you don't include any supporting documents - just keep them filed somewhere you could conceivably find them (though the chances of audit are pretty slim).

Frankly, it's up to you whether or not you file the back FBARs or not. Yeah, technically they ask for 6 years back. But if your interest is covered by your standard deduction, chances are they aren't going to make an issue out of missing filings for the back years. Get this year's FBAR in on time (i.e. by June 30th) and I suspect the matter will be resolved.
Cheers,
Bev


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