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IRA/Roth IRA and Foreign income exclusion #4634769
01/14/18 04:09 PM
01/14/18 04:09 PM
Joined: Oct 2011
Posts: 2,975
Chicago, IL
Brybo86 Offline OP
Brybo86  Offline OP
Joined: Oct 2011
Posts: 2,975
Chicago, IL
Parents live overseas and earn roughly 45k each year.
They claim the foreign income exclusion on their taxes which reduces the amount they pay taxes by -101k.

So their AGI last year was 4k which was earned from a small rental property overseas.
on W2 they have SS and medicare taxes taken out of the 45k

They have their W4 set up that no federal income tax is withheld because it is all refunded due to the foreign income exclusion.

Regarding trad and roth IRA. Since they already have income drastically reduced it makes no sense to contribute to a trad IRA because their taxable income is already reduced as much as possible.

My questions are can they contribute 6500 each(over 55 yrs old) to a Roth IRA and still pay no tax due to the Foreign income exclusion?

If they take social security now ~20k a year i think they will still pay no tax on it due to the foreign income exclusion?

Can they roll trad IRA to Roth which will add to taxable income but as long as total income(45k current wages, plus 20K social security, plus about 36K in Roth conversion) is under the 101k foreign income exclusion i think it wont actually trigger any taxes?

Im thinking a 36K Roth conversion will cause their line 1040 line 15A to jump as well as 15B to list 36k as taxable income. which will possibly be reduced to zero by the 101k foreign income exclusion.

theoretically on 1040 he has
line 15b 36k
line 20b 20k
line 21 -45k
so line 22 would be 56k?

any thoughts?

plugging in to the form it looks like the calculation for the FIE is calculated off of w2 wages and tips and not adjust by roth or SS amount

so roth conversion would be 100% taxable as the FIE is calculated before

in typing this out it seems as though he cant convert to roth without paying taxes...
also i dont think SS income is reduced by the FIE

but are they still eligible to contribute 6500 each(over 55 yrs old) to a Roth IRA even though their line 22 was only 4000 last year?

Last edited by Brybo86; 01/14/18 04:21 PM.

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Re: IRA/Roth IRA and Foreign income exclusion [Re: Brybo86] #4634842
01/14/18 05:11 PM
01/14/18 05:11 PM
Joined: Feb 2012
Posts: 3,870
Bandito440 Offline
Bandito440  Offline
Joined: Feb 2012
Posts: 3,870
Iíve never dealt with foreign income, so I canít be of much assistance.

Iím certain you could get an answer at the tax subreddit though. There are plenty of nice folks there who can help you out.

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