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Amiller1
Level 2

Foreign income deduction and IRA contribution in TT

I live overseas and all of my foreign earned income is excluded from US taxes.  According to the IRS website, I should be able to ignore the foreign income deduction for the purposes of calculating my eligibility for an IRA contribution (see below).  TurboTax does not make this adjustment, so it is telling me I am not eligible to make an IRA contribution.  Does anyone know a work-around for this?

 

"If you exclude income under the foreign earned income exclusion or the foreign housing exclusion, you must add back the excluded amounts in determining your compensation for purposes of the IRA limits. Likewise, for purposes of determining the IRA limits, do not reduce your compensation by any foreign housing deductions." https://www.irs.gov/individuals/international-taxpayers/individual-retirement-arrangements

8 Replies
SusanY1
Employee Tax Expert

Foreign income deduction and IRA contribution in TT

This page refers to something a little different, although the way it reads is rather confusing. 

 

 

If you do not have any earned income on your tax return because you have excluded it all through the Foreign Earned Income Exclusion (FEIE), you are not eligible to contribute to an Individual Retirement Account.

 

Note the first paragraph at the same link reads: Contributions to your individual retirement accounts (IRAs) that are Traditional IRAs or Roth IRAs are generally limited to a certain annual dollar amount ($5,500 for 2014 through 2016, or $6,500 if 50 or older) or your compensation that is includible in your gross income for the tax year. (emphasis added.) 

 

The Modified Adjusted Gross Income (MAGI) refers to the upper income limitation for deduction - in determining whether or not you can deduct a contribution (if eligible to make it), you must add back in the income (but not the housing deduction) that is excluded by the FEIE.  So the add-back applies if you have included some earned income, to determine that your income is within the allowable range (not too high.)  

 

If you are interested in contributing to an IRA as someone with foreign income you can consider, depending on the amount of your income, using only the housing exclusion.   (If you wish to do this, you cannot use the online version of the program as you will need to override an entry on the Form 2555 itself and you cannot e-File the return.)  

 

If you reside where you also pay foreign taxes, using the foreign tax credit instead of the FEIE will also allow for a contribution, but if you have taken the FEIE in the past this will be considered a revocation of the FEIE and you will be ineligible to take the exclusion for 5 years unless you obtain prior permission from the IRS.  We caution against making this type of switch without consulting a tax professional to assist in determining if this is appropriate for you.  

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Amiller1
Level 2

Foreign income deduction and IRA contribution in TT

Does anyone else have an opinion on this?  The IRS document reads pretty clearly about not including the foreign earned income deduction for IRA calculation purposes.  Also, several other sources on the internet state that you should add back the foreign income deduction for IRA calculation purposes.

AmeliesUncle
Level 11

Foreign income deduction and IRA contribution in TT

Unfortunately, the IRS webpage seems to be wrong.  I suspect that paragraph MEANT to say that the Foreign Earned Income Exclusion is added back for purposes of your MAGI, which can affect your IRA contributions.

 

IRS Publication 590a makes it pretty clear, and it coincides with what Tax Code says that it the "compensation" must be "includible in the individual’s gross income".

 

IRS Publication 590a:

 

What Isn’t Compensation?

Compensation doesn’t include any of the following items.

  • Earnings and profits from property, such as rental income, interest income, and dividend income.

  • Pension or annuity income.

  • Deferred compensation received (compensation payments postponed from a past year).

  • Income from a partnership for which you don’t provide services that are a material income-producing factor.

  • Conservation Reserve Program (CRP) payments reported on Schedule SE (Form 1040 or 1040-SR), line 1b.

  • Any amounts (other than combat pay) you exclude from income, such as foreign earned income and housing costs.

https://www.irs.gov/publications/p590a

 

Roth Limit §408A(c)(2)(A)

https://www.law.cornell.edu/uscode/text/26/408A#c

 

Which point to §219 which requires it to be "includible in the individual’s gross income".

https://www.law.cornell.edu/uscode/text/26/219

 

AO4
Level 1

Foreign income deduction and IRA contribution in TT

Given what is said above, can one take the Foreign Income Exclusion on  most BUT NOT all of one's foreign income, pay regular US taxes on the non excluded part and  make IRA contributions against the non excluded and regularly taxed income?

 

AO4
Level 1

Foreign income deduction and IRA contribution in TT

In one place, IRS instructions  seem to say that you can take the Foreign Income Exclusion and also make an IRA contribution.  And in another place ( page 7 of Pub 590a) it says that "excluded" income  can not be counted as "compensation" required to make IRA contributions.  My question:  can one exclude most but not all of  one's foreign income, pay regular taxes on the remaining portion of NON-excluded income, and make IRA contributions against the NON-excluded income? 

macuser_22
Level 15

Foreign income deduction and IRA contribution in TT


@AO4 wrote:

In one place, IRS instructions  seem to say that you can take the Foreign Income Exclusion and also make an IRA contribution.  And in another place ( page 7 of Pub 590a) it says that "excluded" income  can not be counted as "compensation" required to make IRA contributions.  My question:  can one exclude most but not all of  one's foreign income, pay regular taxes on the remaining portion of NON-excluded income, and make IRA contributions against the NON-excluded income? 


The IRS is clear - to be used for an IRA contribution  it must be *taxable* compensation.    Excluded income is not taxable.

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**
AmeliesUncle
Level 11

Foreign income deduction and IRA contribution in TT


@AO4 wrote:

My question:  can one exclude most but not all of  one's foreign income, pay regular taxes on the remaining portion of NON-excluded income, and make IRA contributions against the NON-excluded income? 


No.  If you use the Foreign Earned Income Exclusion, that covers all eligible income.  It is not an option to pick-and-choose how much you apply it to.  You would only qualify if some of your earned income does not fall under the exclusion.

 

AO4
Level 1

Foreign income deduction and IRA contribution in TT

Thanks much

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