IRA Contributions When Living Overseas

[beowulf]

I'm not sure if this is the right place for this question, but it is the place for expert financial info.

If a US citizen lives full time in a foreign country and performs some work there on the local economy (not for a US company), my understanding is that they do not have to pay US income tax on that income. I'm pretty sure I've read that in several places.

The question is whether that income can be used to justify a contribution to either a traditional or Roth IRA? The IRS rules I have read don't seem to be real explicit on this, but I'm not a lawyer or accountant, so I may well be missing something. I think the answer is no, if you have no US taxable work income, you can't contribute.

Any thoughts on this?

Thanks in advance.

 

[Rambler]

Restonham, whether or not you pay taxes depends on how much you make, and how much tax you pay in the host country. Regardless, you have to file a return, every year, or face penalties. I am not sure about your ability contribute to a Roth or IRA if you don't make enough (after exemptions etc) but I'm sure you can contribute if you have tax to pay. Best advice is to visit the US embassy or consulate in your area and have the explain the issues. US tax accountants are hugely expensive overseas.

R

 

[MichaelB]

Hi restonham

If a US citizen lives full time in a foreign country and performs some work there on the local economy (not for a US company), my understanding is that they do not have to pay US income tax on that income. I'm pretty sure I've read that in several places.

The US gov’t taxes you on worldwide income regardless of your employer. You are entitled to an exclusion of $87600 and then pay high marginal rates on the remainder. This is called the Foreign Earned Income Exclusion.

Your eligibility for the FEIE is based on residency as determined by two IRS tests – Bona Fide residency or Physical Presence.

The question is whether that income can be used to justify a contribution to either a traditional or Roth IRA? The IRS rules I have read don't seem to be real explicit on this, but I'm not a lawyer or accountant, so I may well be missing something. I think the answer is no, if you have no US taxable work income, you can't contribute.

You can contribute to a deductible IRA or ROTH but income excluded from the Foreign Earned Income Exclusion is not eligible for either. You have to calculate adjusted earned income with an IRS worksheet to confirm your eligibility.

IRS detail are here. Foreign Earned Income Exclusion

I would also urge you to familiarize yourself with this pub 54 – the IRS treatment of citizens living overseas ... Publication 54 (2008), Tax Guide for U.S. Citizens and Resident Aliens Abroad

Regards, Michael

 

[Ed_The_Gypsy]

If you do not qualify for the FEIE, you would still have to pay US taxes but get credit for paying foreign taxes.

I pay a cross-border accountant to sort this out for me. Even he makes mistakes.

 

[deserat]

Limit for 2009 is $91,400 on income exclusion for federal income tax - you must pay the full amount of FICA and Medicare, which is 15.3%. I have not yet determined if the income under the exclusion can be placed into a tax-deferred retirement vehicle (401K, 403B or IRA) or tax-free vehicle (Roth). Although it doesn't seem like that would be eligible as you haven't paid tax on it - based on the post above, it isn't. I am not placing that money into those types of accounts as I don't want to pay a penalty later on. I have other means by which to fund tax-deferred accounts.

The key for me is to make sure I don't earn over that exclusion amount - I have two 'jobs' - one in which I will pay taxes on all of the income as if I lived in the US (military) and one in which I will qualify for the FEIE - I handle each separately with separate bank accounts and separate tax situations.

Do make sure you are very familiar with the tax pubs on this area - I've known a few people who've gotten into trouble with both governments by not being careful about the rules.

 

[Red_y]

Limit for 2009 is $91,400 on income exclusion for federal income tax - you must pay the full amount of FICA and Medicare, which is 15.3%.

Not sure if I agree with this...I'm a US Citizen living in a foreign country as a permanent resident. When I have wage income in the foreign country, I exclude it on my US tax return using the FEIE. I don't pay any FICA or Medicare taxes on the income...it's already been taxed for "social security" and "medicare" programs in my country of residence.

Maybe what you're saying is true for self-employment income, but not for wages/salary?

 

[deserat]

Not sure if I agree with this...I'm a US Citizen living in a foreign country as a permanent resident. When I have wage income in the foreign country, I exclude it on my US tax return using the FEIE. I don't pay any FICA or Medicare taxes on the income...it's already been taxed for "social security" and "medicare" programs in my country of residence.

Maybe what you're saying is true for self-employment income, but not for wages/salary?

You are right - sorry about that - my self-employment income is taxed for FICA/etc, but not for the federal tax.

I do know that some contractors out here have the FEIE - but they must pay the FICA - remember Geithner and his tax problems? He didn't pay the FICA portion of his taxes even though he had been 'reimbursed' for that 'expense' by his employer.