partial Foreign Earned Income Exclusion and Roth IRA

[vnpdad5]

I want to contribute $6000 to my 2019 Roth IRA.  My salary does not exceed the limit.  However, I am currently based out of the country.  My entire salary can be excluded with the Foreign Earned Income Exclusion.  However, Roth IRA does not allow excluded income to count towards the earned income requirement.

My question is can I voluntarily not exclude the full amount?  For example, if my salary was $80k, can I exclude $74k only instead of $80k?  That way, $6000 is now considered taxable income, but it also counts toward the Roth IRA minimum and I can then contribute to Roth IRA.

[AmeliesUncle]

No.  If you use the Foreign Earned Income Exclusion, it applies to all of your qualifying income.  You are not allowed to selectively choose how much to exclude.

[vnpdad5]

Thank you, @AmeliesUncle!  I have been trying to find confirmation of that.

Would you mind sharing where you got this information?

[AO4]

While I think it may not be allowable, I would be very interested in the IRS citation that says so.  I have searched for it, but have yet to find it. 

[SusanY1]

The Foreign Earned Income Exclusion (FEIE), once elected, remains in effect until the taxpayer "revokes" the election.  One way to revoke it is to not use it.  Once a taxpayer revokes this election, the FEIE cannot be used for a period of 5 years without receiving permission from the IRS.  (This permission is requested via a Private Letter Ruling, which has a $2,000 application fee, and permission is not automatically granted. See: Revoking your Choice to Exclude Foreign Earned Income )  

While it is not possible to only exclude part of your income using the FEIE, it is allowed to take only the Foreign Housing Exclusion and elect not to exclude your income, which is one method to create taxable income in order to contribute to a Roth IRA.  (The same caution applies here about "revoking" your Foreign Earned Income Exclusion election.)  Note, TurboTax online cannot make this adjustment, but TurboTax Download/CD can be manually edited for this.  

Taxpayers wishing to make contributions to IRAs who are also paying tax to their resident country may also elect to use the Foreign Tax Credit in lieu of taking the exclusion (this also allows the taxpayer to qualify for refundable child tax credits, if all other conditions for the credit are met.) 

Choosing the Foreign Earned Income Election 

So, there ARE ways to have foreign earned income, pay little to no tax, and contribute to your Roth IRA - particularly if you are paying other foreign taxes - but making a partial election to exclude Foreign Earned Income (other than electing only to take the housing exclusion) is not permitted.    

[Gregbert]

@SusanY1 

You say "it is not possible to only exclude part of your income using the FEIE"

but this seems to contradict the following:  https://ttlc.intuit.com/community/tax-credits-and-deductions/help/how-do-u-s-taxpayers-living-and-wo...

"If you choose to use the FEIE, you can then use the FTC on any income that exceeds the allowed exclusion amount. You can also use the FTC by itself."

However, I cannot figure out how to use the FEIE on just PART of my income. Can you use FEIE on just part of your income? 

[AmeliesUncle]

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@Gregbert wrote:

that exceeds the allowed exclusion amount.

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That EXCEEDS the exclusion amount.  So if you have already 'maxed out' the exclusion, yes, you can use the Foreign Tax Credit on the amount that exceeds the allowable exclusion.

[SusanY1 · Accepted solution]

It is not in conflict.  As @AmeliesUncle points out, this only refers to when the FEIE has been exceeded, or maxed out. 

Once you have used all of the available FEIE, and you have "excess income" the you have "taxable compensation" that can be used for the foreign tax credit, or for consideration for Roth IRA or Traditional IRA contributions. 

You would need to have income in excess of the exclusion amount ($105,900 for 2020) in order to contribute to a Roth IRA and only the amount above the $105,900 would be eligible to be considered for the contribution OR you would need to revoke (or elect not to take, if this is your first year with foreign earned income) the exclusion and include the foreign income as taxable compensation.  

If you do this, you can take a credit for foreign taxes paid instead and this allows you to make IRA contributions and receive refundable child tax credits (if you have qualifying children).  However, if you have been taking the exclusion and revoke it, you can't switch back for 5 years without special permission from the IRS (which is not easily obtained.) 

You will not find an easy reference in a publication that states what you are looking for, but it is not allowed to take a partial exclusion with the FEIE. You must have taxable compensation by either having compensation that exceeds the FEIE, or by electing to not use the FEIE or revoking the election.  

[Gregbert]

Thank you @SusanY1 and @AmeliesUncle - that resolves the apparent conflict.

However I am unable to figure out to do a combination of FEIE and FTC, as my choices end up giving me a ZERO foreign tax credit. I think that this is new encompassed in the OP's question, so I will start a new question at the following. I would appreciate your thoughts there as well, if possible.

https://ttlc.intuit.com/community/tax-credits-deductions/discussion/combination-foreign-earned-incom...