Author Topic: Investing from abroad - with a catch  (Read 2495 times)

jdlayman

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Investing from abroad - with a catch
« on: June 06, 2015, 12:20:14 AM »
Long-time lurker, first-time poster.

My wife and I teach abroad. We pay no taxes, make about 65k per year (household) and claim FEIE. We're almost done with student loans, and are ready to invest. My question for all of you is; what are the best options for us?

By claiming FEIE, we are not able to put money into our ROTH, and our employer doesn't have a 401k set up. We won't make over the FEIE alotted amount any time soon, nor is the country we live in going to start taxing its citizens anytime soon. Where is the best place to put our money?

SunnySaver

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Re: Investing from abroad - with a catch
« Reply #1 on: June 07, 2015, 10:36:50 AM »
The price you pay for excluding all your earned income using the FEIE is being unable to contribute to an IRA (Roth or Traditional). The question of where to put your money seems pretty straightforward. Without a 401k option, it looks like you'll be using a taxable account for your investments.

The question of what to buy in that taxable account doesn't have a simple answer. As you probably know already, unearned income can't be excluded using the FEIE, so you'll be paying US taxes on capital gains/dividends each year you realize/receive them. It looks like you're safely in the 15% tax bracket now, so you'll enjoy the 0% tax rate for long term capital gains.

One possible approach: choose investments that minimize short term capital gains/dividends, and thus ongoing US taxes. Some mutual funds are "tax managed" for exactly this purpose, and you can check the last year's distributions to get an idea what to expect from any mutual fund/ETF. There's also BRK that never pays dividends, and it behaves more like a fund than an individual stock. This approach lets you decide when to sell in the future and realize a capital gain, which is presumably a long term gain by then. If the 0% long term capital gains tax rate remains for the 15% tax bracket when you do sell (and you stay within that bracket, of course), you wouldn't owe any US tax on that sale.

Just remember that minimizing taxes is only one factor to consider, so don't forget risk tolerance, time horizon, diversification, etc!

jdlayman

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Re: Investing from abroad - with a catch
« Reply #2 on: August 20, 2015, 05:58:42 AM »
So I wrote this, went on summer holiday and promptly forgot all about it. Thank you so much for writing back.

After parsing through your response, I'm pretty sure I know what I need to do - learn wayyyyy more. I understood about a quarter of what you said, which tells me I'm not ready to do anything, really. I'll be coming back to your response as I learn more and more. Thanks again for the advice.

SunnySaver

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Re: Investing from abroad - with a catch
« Reply #3 on: August 20, 2015, 07:55:08 AM »
You're welcome! Just remember the worst case is paying tax on gains (profit!). There is no 100% tax bracket, so you'll still end up with more than if you'd been earning nothing while you contemplated the perfect strategy.

iluv2fly1

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Re: Investing from abroad - with a catch
« Reply #4 on: August 24, 2015, 07:25:38 AM »
I would just quickly estimate the amount you will be making before stressing about it.  You imply that you aren't starting with that much so I suspect your might be in a similar position to me.

Since you eliminate all of your income through the foreign earned income exclusion, you can make the standard deductions and a bit more depending on how your deductions work before you have to start paying US taxes (and even once you do it will be in a crazy low tax bracket). If you don't have too much to invest, just start and don't worry too much about the taxes until it starts building up a bit.

SunnySaver

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Re: Investing from abroad - with a catch
« Reply #5 on: August 25, 2015, 06:13:29 AM »
Since you eliminate all of your income through the foreign earned income exclusion, you can make the standard deductions and a bit more depending on how your deductions work before you have to start paying US taxes (and even once you do it will be in a crazy low tax bracket).

Because of the way you have to calculate tax due when using FEIE, excluding 100% of your earned income using FEIE does not generally mean you can make up to the standard deduction+exemption amounts, e.g. as investment profits, without owing tax.

As I mentioned in another thread, FEIE does not mean you pay "tax on (income - excluded income)" but rather "tax on income - tax on excluded income." To put it another way, you are excluding the first $X rather than the last $X. Check out the Foreign Earned Income Tax Worksheet for 1040 line 44 in the form 1040 instructions.