topic Is it possible to make a qualified IRA deposit when your salary is all from foreign sources? in Deductions & credits

Is it possible to make a qualified IRA deposit when your salary is all from foreign sources?

kevboy — Sat, 13 Mar 2021 23:30:15 GMT

Re: Is it possible to make a qualified IRA deposit when your salary is all from foreign sources?

macuser_22 — Sat, 13 Mar 2021 23:34:42 GMT

Not if the foreign income is excluded from your tax.

Only taxable compensation is eligible.

Re: Is it possible to make a qualified IRA deposit when your salary is all from foreign sources?

Anonymous — Sun, 14 Mar 2021 02:00:21 GMT

There is more than one way to avoid paying extra tax when living abroad. Most people go straight to the foreign earned income exclusion because it is the one that is talked about the most. However, it has a number of drawbacks. The inability to contribute to certain retirement accounts is one, being unable to receive refundable child tax credits (where applicable) is another.

There are two strategies that can work, depending on your circumstances. One is to use the foreign tax credit instead of the foreign earned income exclusion. This one works if you are paying taxes to your resident country at a rate greater than or equal to what you would pay in the U.S. This is almost all countries that collect a personal income tax. There are some exceptions, of course (Singapore comes to mind) but by and large, U.S. income tax is low compared to the rest of the world.

If you are fortunate enough not to be paying taxes to another country, you could take a look at the option of taking only the foreign housing exclusion (or deduction for the self-employed), and not the income exclusion.

The housing exclusion is based on expenses paid by "employer-provided funds" - but your salary is considered employer-provided funds. It is calculated daily and a full year in a city that doesn't have a higher differential could allow you to exclude $38,280. Higher amounts range as high as $114,300 (Hong Kong). You can check your location here: https://www.irs.gov/irb/2020-11_IRB#NOT-2020-13 If it's not on the list, it's $38,280.

When you combine this with the standard deduction for your filing status, it could be enough to eliminate tax depending on where you are living and the amount of income you have earned.

You do have to take care with this if you have previously filed using the foreign earned income exclusion. Failing to use the exclusion in each year eligible after the first year amounts to revoking it. Once revoked, it cannot be used again for 5 years without permission from the IRS (which is expensive to get- $2,000!)

TurboTax online cannot handle the housing exclusion only (unless it has changed this year) but the downloaded version of the program allows you to work more on the forms directly which is where you can force that option. It's perfectly okay to do this, it's just that this type of thing is not the sort of thing that TurboTax customers are doing in large numbers, so it's not a focus of the program.

Take care if you've used the exclusion in the past before switching to be sure it is right for you but simply switching to the tax credit alone if you are paying taxes has several benefits to you and is usually the better way to go when it eliminates your US liability.

Re: Is it possible to make a qualified IRA deposit when your salary is all from foreign sources?

macuser_22 — Sun, 14 Mar 2021 02:06:46 GMT

@Anonymous

Your response has NOTHING to do with the question asked about an IRA. What question are you trying to answer?

Re: Is it possible to make a qualified IRA deposit when your salary is all from foreign sources?

Anonymous — Sun, 14 Mar 2021 04:38:42 GMT

Yes, it does. this is how you get taxable compensation that allows you to contribute to an IRA. As I mentioned in the beginning, one of the drawbacks of using FEIE is that you cannot contribute to an IRA. However, if you go one of these other routes, you may have taxable compensation that does allow you to contribute to an IRA. This happens with certainty using only foreign tax credit, and if you use the foreign housing exclusion you may qualify and still not owe tax if the excess above is under the standard deduction amount. The income that is subject to the standard deduction is "taxable compensation" for purposes of determining an IRA contribution while the income excluded under foreign housing or foreign income exclusions is not.

I am sorry if the connection wasn't clear, but I did mention the retirement in the beginning paragraph. I admit I didn't link it particularly well in the text. But it IS about contributing to an IRA- and how it can be done if you have only foreign source wages.

@macuser_22

Re: Is it possible to make a qualified IRA deposit when your salary is all from foreign sources?

kevboy — Sun, 14 Mar 2021 09:34:09 GMT

@Anonymous

Thank you for the detailed answer. It was quite helpful. The money is from Japan, but since I own the company, I set it up in a way that my salary is quite low and the business pays for much of my expenses. This helps with my Japanese taxes. Ordinarily, income taxes very well might be higher here, but a give myself a low salary. Anyway, it ends up that going with the foreign earned income exclusion was best.

I will save your and @macuser_22 's replies for future reference. Btw, thanks also to @macuser_22 for your input!