I work abroad and qualify for foreign earned income exclusion, but I also made money doing contract work in the US. Does this qualify me to contribute to my Roth IRA?

[ianmbuckner]

I've entered my US contract income in TurboTax, which is higher than the Roth IRA contributions I made, but TurboTax is telling me I have to pay the $360 fee for contributing more than I earned in 2021. Am I doing something wrong? Or do I simply not qualify in this scenario?

[DanaB27]

You need taxable compensation to be able to make IRA contributions. The foreign income excluded won't count. 

If you are self-employed (a sole proprietor or a partner), taxable compensation is the net earnings from your trade or business reduced by the total of:

• The deduction for contributions made on your behalf to retirement plans, and
• The deduction allowed for the deductible part of your self-employment taxes.

To avoid the 6% tax on excess contributions, you must withdraw:

• the excess contributions from your IRA by the due date of your individual income tax return (including extensions); and
• any income earned on the excess contribution.

[singermany]

I'm in a similar situation. 

Is it possible to reduce the foreign earned income exemption, so that some of the foreign income becomes taxable compensation and I qualify to contribute to my IRA? 

Or am I simply out of luck and need to withdraw the contribution?

[DaveF1006]

Yes, there is a way to do this.  First of all, report the the amount of income you do not wish to exclude.

1. Log into your account
2. Select Wages and income>Less Common Income
3. Miscellaneous Income, 1099-A, 1099>start
4. Scroll to the bottom of the page to Other Reportable Income
5. Other taxable income, answer yes
6. Then give a brief description of the income and the amount that you do not wish to exclude.  Here you may give it a description like  Foreign Earned Income not Subject to Exclusion. 

Now to report the income you wish to exclude.

1. Log into your account
2. Select Wages and income>Less Common Income
3. Foreign Earned income and Exclusion

Once this is enter, you should be able to claim your contribution.

[singermany]

Thanks @DaveF1006  - this is a very helpful approach, and you explained the steps very clearly!

I am still getting the error.

Are there minimums that need to be met in either foreign earned income or the "other" category to have these recognized? The income does show in the Miscellaneous category as you advised, but I'm at a loss as to what's not calcuating:

[singermany]

@DaveF1006: If it's possible and necessary (I read your other posts - you're very helpful! 🙂) I created an agent token 1198189 for you to see if the calculations are working properly. 

[DaveF1006]

Yes, I may have a solution to your dilemma. The income must be earned income to qualify for the contribution deduction.  Here is the best way to report.

Go back to the section where you entered the information for the Foreign Income Exclusion under the Less Common income heading in federal>wages and income.

1. Enter the full amount of your Foreign Income.
2. Continue through the interview until it asks if you would like to exclude your income. Say yes.
3. Answer all the questions until you reach the screen informing you that you qualify for the exclusion.
4. The next screen asks if you have deductions against your foreign income.  Here you can report moving expenses or other deductions relating to your move. These deductions will actually reduce your Foreign Income Exclusion and become taxable income in your return.

The amount you claim for deductions will actually appear as taxable income in your return and now you should have income to claim your IRA contribution.  I worked this out in my sample return and it appeared correctly.

Let me know if this works. if not, i still have your token. Be sure to delete the previous entry I suggested.

@singermany 

[singermany]

Thanks, @DaveF1006! That worked like a charm!

I'm not able to mark this as the answer, presumably because I'm not the OP, but THANK YOU THANK YOU!