Should I use form 2555

[robertone139]

I would like to switch from an s corporation to individual tax filing (married filing joint) to maximize FEIE and deductions without the additional expenses of SS and MC

[jtax]

Not sure I understand the question. Either you were an owner/employee of an s-corp in 2023 or you weren't. You can't change after the fact. You certainly could shutdown your s-corp in 2024 and act as a sole proprietor after that date.

Also I wonder if you have the s-corp vs. sole proprietor  SS/MC benefits backwards. An s-corp owner does not pay SS/MC on the s-corp's profits. Only on wages. But you MUST pay "reasonable" wages, which means whatever the market rate for someone performing your job would get. And you must pay SS/MC on those reasonable wages. A sole proprietor pays SS/MC on a net self-employment income. (I.e. business gross income minus business expenses).

Please clarify if I am misunderstanding.

[robertone139]

You are correct, I started an S corp in 2023 for my wife and me to keep contributing to SS/MC and do not lose that money. However using the ss.gov retirement calculator we realized that is costing us almost 20,000 dollars per year in SS taxes plus other expenses not to lose 200$/ month for each of us by the time we reach 67.

I have a CPA who's taking care of the corporate taxes and payroll, however those are other expenses bringing the total to over 23K.

I could dissolve the corporation and just file married joint next year as my tax liability would be way less than what is costing now.

moving on, I would need guidance in how to apply the 126,500$ FEIE, the 29,200$ standard deduction and the 16,000$ (combined) IRA contributions for tax year 2024.

Hope this is not too confusing.

[jtax]

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@robertone139 wrote:

You are correct, I started an S corp in 2023 for my wife and me to keep contributing to SS/MC and do not lose that money. However using the ss.gov retirement calculator we realized that is costing us almost 20,000 dollars per year in SS taxes plus other expenses not to lose 200$/ month for each of us by the time we reach 67.

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I'm not sure I understand. How is structuring the business costing you $20k per year in SS taxes? It ought to be lowering SS paid now because because your W2 wages are lower (only a "reasonable" salary, the reminder being profit). Of course you do have additional expenses (state annual filings, 1065 prep, etc.).

If you are paying out all of the s-corp's earnings after expenses as wages, then there isn't much tax reason to have the s-corp. (Liability protection, handling non-owner employees, etc. are different concerns. Ask your attorney.) Why? Because you're paying the same SS tax plus expenses of running the corporation.

yes, you will be lowering your SS income upon retirement. But you need to figure what you will do with the savings. If you invest it and the market does well as it has for the last 30+ yrs, you would probably do better than SS. See for example figure 5 of  of https://files.stlouisfed.org/files/htdocs/publications/review/05/03/part1/GarrettRhine.pdf

I assume that are are living overseas with an overseas tax home as required for the FEIE being paid by your US s-corp. You should be to go through the TT FEIE interview. It will ask you all of the questions.  Since 2023 is in the books, I'd recommend doing that to see what the result it. It is hard to advise because a lot depends upon your other income and the foreign taxes paid. I'd also recommend doing the foreign tax credit (FTC) Form 1116 for the s-corp profit and for all icnome instead of FEIE. So run through 1) FEIE/1116, 2) no FEIE but all 1116, 3) as a sole prop with all wage and profit income and FEIE,  4) same as 3 without FEIE but with 1116).

Then compare the actual results.

Note the FEIE only works for the first $112k of foreign earned income. If you have more than that you'll need to use the FTC also.

If you have little other income and pay significant foreign tax, no matter what way you do it, you should pay very little US income tax. But if any of those assumptions is off, the results can differ. There are a number of ways that one can win up paying US and foreign tax, but not usually if your only income is foreign income.

This is very complicated stuff unless everything is very simple. Rather than relying on volunteer Internet advice, I'm sorry to say that you would probably be best off seeking advisal from a professional advisor (CPA, enrolled agent, or tax attorney) who deals with foreign tax issues every day (not just a couple times a year).

[robertone139]

FEIE for 2023 is 120,000$ and is going to be 126,500$ for 2024, I am paying no local income taxes where I live.

On the other end the local cost of living is high as is the rent, so the SS tax on what we get paid by the s corp is 1542$ (15.3%) monthly the rest of the expenses are those required to maintain the corporation with the CPA.

My wife and I are the only employees and I own the corporation.

The tax return for 2023 is being prepared by my CPA as there were many other factors.

Perhaps my question was not formulated correctly, going forward for the next tax return all I needed to know was what I would need to file a straightforward 1040 if my only income is what I make from a foreign source outside the USA living abroad 

Would my taxable AGI result from:

Income, minus FEIE (first 126,500$), minus standard deduction, minus IRA contributions (traditional) (lowering the AGI from the top for bracket calculation).

Theoretical numbers:

income 210000-

FEIE.      126500=

                 83500.

For tax bracket.  210000  (22% as income after FEIE is taxed at the top)

Residual after FEIE          83500-

Standard deduction.       29200-

IRA contr (traditional).     16000=

Tax liable AGI                   38300 @22%= 8426

That is 8426$ vs 18504$+expenses that I would not need and I can invest that in other ways.

[jtax]

Assuming you are married filing jointly, have a foreign tax home, have no other income, and your income is eligible, your numbers are look to be basically correct (except see below). However, there are many details and to be sure I suggest mocking up a 2024 return answering all the questions based on your overall situation. In this volunteer Internet forum we never have all of your info.

A couple of things things:

1. [edit The remainder of this paragraph is not correct for the FEIE but is otherwise generally correct.]

the tax due on the taxable income you calculate is not correct. 22% is a marginal rate. Only your taxable income between [edit  $94.3 and $201k]  (2024, MFJ) [originally I said $63.1k and $100.5k, which is head of household) istaxed @ 22%. Income below that is taxed some at 10% and some at 12%. (Capital gains and qualified dividends might be at yet another rate.) See,  e.g.,  table 1 of https://taxfoundation.org/data/all/federal/2024-tax-brackets/ 

2. You should also see if the foreign tax credit (FTC)/Form 1116 will reduce your US tax to zero. If all your income is foreign then you should get a credit for foreign income (not SS/MC equiv) tax. But you have to prorate for the foreign income excluded by the FEIE. You might not need the FEIE as the FTC could wipe out of all your US income.

There are complications if you have other income and you should always check the US Tax Treaty with your resident county. Some kinds of income are taxed to the resident country, other's to the US. This most often happens to US securities dividends or interest taxed at  less than 10% or 15%. You haven't said you have such income so that may not mater. For treaties see https://www.irs.gov/businesses/international-businesses/united-states-income-tax-treaties-a-to-z

3. You don't mention self-employment tax or SS/MC.  That is separate. You should check to see if the foreign country in which your tax home is has a "Totalization Agreement" with the US. Those agreements basically determine which country you pay SS tax to, so you don't wind up paying twice. They also deal with benefit credits. You could start here:  https://www.ssa.gov/international/agreement_descriptions.html

[robertone139]

Thanks, great support, and you got most of it right.

1) No other income

2) MFJ, bracket is actually 94,300-201,050

3) Unfortunately no FTC as there are no income taxes paid in this here country, no tax treaty either and no ss             bilateral agreements, however the company does pay into a local ss locally known as National Insurance.

Where I get my doubts is here and I am citing the IRS on this: 

https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion#:~:text=Figu... 

and particularly this paragraph:

Figuring the tax: If you qualify for and claim the foreign earned income exclusion, the foreign housing exclusion, or both, must figure the tax on your remaining non-excluded income using the tax rates that would have applied had you not claimed the exclusion(s). Use the Foreign Earned Income Tax Worksheet in the Form 1040 Instructions.

That is where I figured the 22% tax bracket.

Then I ran a mock 2555/1040/schedule1 return and I must have made a mistake because it came out with tax due 0, nada, zilch while I know I had a residue of about 30k taxable income after standard deduction and 16k into a qualified  traditional IRA.

[jtax]

@robertone139 thank you for the clarifications. I will edit my response to correct my errors. You have clearly done some good research and and have a better idea of what's going on than post posters.

You are correct about tax bracket range. I incorrectly used the head-of-household column.

Your cite to the 1040 instructions is also correct. My explanation of marginal tax brackets is usually correct, but does not apply in the case of use of the FEIE. (It used to but they changed that a number of years ago.)

I don't know why your mocked up return is showing zero tax due. I'll see if I can work one up and see what is going on. This is why I like doing sample returns. Otherwise there are details one can miss.

BTW don't know if you're using the PC/Desktop version of TT. Most of the volunteers use that because it lets you see the forms, right click for cross-references, etc. I highly recommend it.

[robertone139]

@jtax ,

Thanks for your reply, I believe the mock return shows zero because I only used the IRS forms online and not the TT software.

I need to download the SW but I was going to see and wait for my CPA.

[jtax]

@robertone139 Question: you said you made the S-corp for you and your wife. Do you and your spouse run/work the business together?

If your wife works in your business and you ditch the s-corp to operate as sole proprietors, then you should be able to each get the max FEIE. This will only help you if your wife actually works in/runs the business. If she doesn't work or works elsewhere that won't help. [For this year with the s-corp not only your W-2 wages but her W2 wages also are separately eligible for the FEIE.]

Note you don't each have a separate sole-proprietorship. Normally you would have a partnership but a married couple filing jointly can elect to to each file schedule c's for their share of the joint venture. See

https://www.irs.gov/faqs/small-business-self-employed-other-business/entities/entities

[robertone139]

@jtax 

Good point, I am the only one working, I had us both as employees to continue contributing to FICA but that is not what is going on in the future.

I'll work on those dissolution articles this week and continue on as a foreign employee of a foreign company.

Hopefully the 2017 tax reform is going to be made permanent or replaced with similar numbers at the end of 2025.

Thanks for your help.