Foreign Earned Income Exclusion, Foreign Tax Credit and IRA contribution

[ajs86]

I lived outside the US for the whole year of 2020, which would qualify me for Foreign Earned Income Exclusion. However, my concern is regarding contribution to a Roth IRA, which according to my research requires non-excluded earned income. My goal is to minimize tax payment while still allowing for the IRA contribution.

My earned income totals less than 100K and is from two sources: 1) a foreign local employer who pays local taxes (which would qualify for foreign tax credit) and 2) a foreign company who pays me through their US branch office and files 1099-NEC with the IRS. No taxes are taken out of this income, so I am responsible for self employment tax + income tax.

Is it possible to exclude only one of the these income sources under the foreign earned income exclusion (such as the 1099-NEC income) and claim the foreign tax credit for the other source, or does all foreign earned income under the threshold need to be excluded if I claim the exclusion?

[DaveF1006 · Accepted solution]

Yes, you can voluntarily choose to exclude your 1099-NEC income as Foreign income and choose take a foreign tax credit from the Foreign Employer. Make sure you qualify to exclude your income in accordance with IRS regulations. To claim, you must be:

• A U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year,
• A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, or
• A U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.

[ajs86]

Thanks, Dave! As a follow up question, it appears if I choose the exclusion, I would have to take it on all following years: "Once you choose to exclude your foreign earned income and/or your foreign housing costs, that choice remains in effect for that year and all later years unless you revoke it. "

Given that I'm only excluding foreign income from one source (the 1099-NEC), what would happen if I don't have this income stream in coming years? Would I have to claim the exclusion for  another source of foreign income such as the one for which I can currently claim a foreign tax credit?

[DaveF1006]

My understanding on this subject is that you can make this election on any stream of foreign income. If you have other income besides the source of your 1099-NEC income, you can make an election for that stream of income to take the credit or the exclusion subject to the limitations you have described above. You would not be required to take the exclusion if it is a separate stream of income.

Please review the following sources regarding these elections.

Choosing the Foreign Earned Income Exclusion

foreign income exclusion

[notaxme]

Thanks for the info. If you received a 1099-NEC for 2020, are you required to file income under the 1099-NEC section? This would make this income taxable - however, I'd like to claim FEIE for income earned under the 1099-NEC. Can I just report the income in the other compensation and foreign income section and NOT report in a 1099-NEC?

[notaxme]

Is all 1099-NECs subject to self employment tax even if you qualify for FEIE (foreign earned income exemption?)

I received a 1099-NEC for 2020 but I did not live in the US at all in 2020. 

[JeffreyR77]

Yes, your income reported on Form 1099-NEC may be eligible to be excluded from income tax under the foreign earned income exclusion, but that does not exclude the income from self-employment tax.

Foreign Earned Income Exclusion (see Other Rules - Self Employment income)