I am an expat and want to know the rules for investing Foreign Income Excluded income?

[leightonkyle]

I want to invest in an IRA and the stock market but all my income is foreign income excluded.  Am I still able to invest in the US stock market at a fee from the government?

[GeoffreyG · Accepted solution]

The answer to your question is that in order to contribute to a tax-deferred retirement account, such as an IRA, you must have earned "compensation" that meets the government's definition of the term.  We can see how it is defined by looking at (the 2016) IRS Publication 590-A, Page 6, Table 1-1, as found at the following link:

https://www.irs.gov/pub/irs-pdf/p590a.pdf

As you can see from reading that table, and the rest of Page 6, amounts excluded from (taxable) income cannot be used to meet the IRS requirement for having earned compensation.  In fact, (excluded) foreign earned income and housing costs are specifically identified as being disqualified.

We're sorry if this answer is not what you were hoping to read; but at least now you know the facts, as they apply to your question.

Thank you for asking about this important topic.

[HSHERRI]

Hello. I understand what you are saying with regard to "compensation" and being allowed to contribute to an IRA, but do you know if you can exclude only a portion of your foreign income?  In other words, I would like to exclude all of my foreign income except $6,000 worth so that I can then contribute to an IRA (all of my foreign earned income is way below the over $100,000 maximum excludable amount)...is this scenario possible? I have been unable to find anywhere on IRS.gov or Turbotax saying whether it is possible to only exclude the amount of foreign income that you want.  

I understand that I technically owe taxes on that income (plus any interest/dividends I made) but the amount I chose not to exclude along with qualified deductions/credits, takes my tax liability to $0.  This would make it worthwhile in my eyes as it allows me to contribute to my IRA.  

I appreciate any feedback.

[ZTaxPro]

The exclusion decreases based off of amounts earned in the U.S., so if you work 15 days in the U.S. that income will not be excluded. Did you make a business trip or have training in the U.S. at all? You could also not claim the exclusion and pay tax on the entire amount. If you income is low enough you might be better off doing that.

[HSHERRI]

I did not work in the US at all, I only came back once for a personal trip.  Unfortunately, if I do not exclude any of the foreign income, it will cause me to have US tax liability since it is not low enough.  So, you do not think I can just exclude any amount I want to?  

[DaveF1006]

i just worked through a Turbo Tax test return and you really don't have an option to exclude part of your foreign earned income.  

[amit0280]

I am adding question here since its related but for lower earned income.
I'm US citizen living and working in India since Feb 2018.
I earned total of 25K USD in 2019 as a consulting fees and did not receive any other benefits/allowances  whatsoever. I've paid taxes (@500 USD) in India and filed the return for the same in India.
I prepared my USA tax return using TurboTax and did not opt for FEIE. I have USA rental property losses which were carried forward. TurboTax calculated zero tax liability using standard deduction.       
With that background I want to know if its possible to contribute to Traditional or ROTH IRA ? If yes, how should I structure my taxes ? I appreciate the great community drive by TurboTax and contributing members for greater good.

[JohnB5677]

If you are claiming the foreign income exclusion, and you have no other income, you can’t contribute to an IRA. 

You may wish to consider using the foreign tax credit instead of the foreign earned income exclusion.  However, please note that if you do not use the foreign earned income exclusion one year (a year you are eligible to use it), you cannot use it again for 5 years.

Revocation of the Foreign Income Exclusion

[amit2020]

Thank you JohnB5677,

Your response precisely answered my question, it also answered questions I might have asked as a followup so thanks for going extra mile.

I will file my taxes using Foreign Tax Credit and will go ahead to contribute my Roth IRA.