Expat Roth Conversion Question

[MrMoogle]

I'm a single expat, and make less than the Foreign Earned Income Exclusion (FEIE), so all my income is excluded (no taxes).  I have a tIRA from a previous 401k rollover.  If I convert part of my tIRA into a Roth IRA such that it is less than the standard deduction + personal exemption, will I have to pay taxes on it? 

If I do, it'll be at my 25% tax rate, so I don't want to do that.  But my understanding is that I don't.  I just haven't been able to google the correct sequence of words to find the answer.  Well I've actually found one that indicated one way and another that indicated the other, but neither were specific enough to give me confidence.

I tried this last year, and I thought I was good, but a coworker said something to question myself.  So I need to figure out if I should recharacterize or not.

Thanks!

[MDM]

Based on a quick look at form 1040 your understanding ("no tax if income < deduction + exemption") is correct.  But that was just a quick look.

Why did you question this last year?

If you fill out form 1040 (and other necessary forms), where do you question your numbers?

Try TaxAct and see what it says for 2014?

[MrMoogle]

I guess I have a poor understanding in the details of the FEIE.  I understand I get to pay no federal income taxes while I'm out here.  And I want to milk that for all it's worth. 

The FEIE only affects income made outside the US, so conversions aren't excluded.  The way I've read it is if you exceed the FEIE you pay your marginal tax on it.  I'm "exceeding" the FEIE by having US income.  The way I understood it, is your deductions and exemptions still come into play first, so I wouldn't have taxes until after that, then I pay at the 25% rate.

My coworker has been an expat much longer than I have, and said I'd have to pay the 25% rate.  He's been wrong before, as have I.  He's even done a Roth conversion maybe a decade ago.

I've never actually filled out a 1040 before, I've always used TurboTax.  That sounds like a bad thing to say...

I won't get my W-2 for another month or so, but I know my total from my last pay stub, so I can use that, then delete it when my W-2 comes in.  I'll let you know how it works out.

Thanks for the help!

[MDM]

I guess I have a poor understanding in the details of the FEIE.  I understand I get to pay no federal income taxes while I'm out here.  And I want to milk that for all it's worth. 

The FEIE only affects income made outside the US, so conversions aren't excluded.  The way I've read it is if you exceed the FEIE you pay your marginal tax on it.  I'm "exceeding" the FEIE by having US income.  The way I understood it, is your deductions and exemptions still come into play first, so I wouldn't have taxes until after that, then I pay at the 25% rate.

My coworker has been an expat much longer than I have, and said I'd have to pay the 25% rate.  He's been wrong before, as have I.  He's even done a Roth conversion maybe a decade ago.

I've never actually filled out a 1040 before, I've always used TurboTax.  That sounds like a bad thing to say...

I won't get my W-2 for another month or so, but I know my total from my last pay stub, so I can use that, then delete it when my W-2 comes in.  I'll let you know how it works out.

Thanks for the help!

For worthwhile milking, it will be helpful for you to get more familiar with forms 2555 and 1040, and the Foreign Earned Income Tax Worksheet.

There is a very simplified FEIE calculation built into the Reader Case Study spreadsheet.  You could download that and throw some numbers at it.  If you get the same results from it and your own (either really your own or via TT) calculations, that is some additional assurance that you are doing things correctly.  If there is a discrepancy I would assume the Case Study tool has been used beyond its capabilities and trust your own work.

It's not all that difficult to do your own calculations.  Tedious, yes - difficult, no.  If you are at all handy with spreadsheets, making your own "regurgitate the IRS instructions" version of forms 1040 and 2555, and the FEI Tax Worksheet would be a few hours work. 

It's worth it to me to pay the TT fee (although I may try TaxAct this year) so I don't have to spend the time checking the minutiae of tax law changes.  I have the "repeat last year's calculations" spreadsheet that I use to double check TT results.  Sometimes I find entries I fat-fingered into TT, and sometimes I find that the law has changed from the previous year.  I've yet to find a TT error that affects us, but the various TT version upgrades that occur during tax season aren't done for cosmetic reasons only....