Maxed out the Foreign Earned Income Credit....

[pappyvanwinkle]

Hi,

My wife and I are administrators at an American School overseas.  When she was an administrator and I was a teacher, we never had to pay any taxes because we were always below the Foreign Earned Income Credit threshold.  Now that we are both administrators, we have exceeded the limit by nearly $100,000 (as the IRS considers housing, and other benefits as taxable).  We also made some rental income off of our property in Colorado.

My question is, how do I shelter more money so that I do not have to pay the $800 in Federal taxes and $100 in state taxes again.  I guess I could make a contribution to my IRA from India; the school would probably do it but I haven't dealt with this before.  What are some other ways that I could shelter the cash?

Thanks,

Pappy

[MVal]

I wonder about this as well... I am thinking about teaching English in Korea and I am not sure how the taxes work when you do that. Do you pay taxes in the country you work in, the country you are a citizen of, or both? And I'm sure the rate must be different as well?

How do you invest when you work abroad? I would want to continue to fund my Roth IRA, but how in the world would that work? If Roths are funded with after-tax money, wouldn't you have to pay some kind of USA tax first? I am so confused.

[beltim]

You have $100k in income over the $160-something thousand limit for the two of you and you only paid $800 in federal taxes?   Wow, your country of residence has remarkably similar taxation levels as the US.

My only suggestion would be an IRA but that's an obvious one and at $260k + income you wouldn't qualify for a deductible IRA.

[johnny847]

You have $100k in income over the $160-something thousand limit for the two of you and you only paid $800 in federal taxes?   Wow, your country of residence has remarkably similar taxation levels as the US.

My only suggestion would be an IRA but that's an obvious one and at $260k + income you wouldn't qualify for a deductible IRA.

What? There's no income limit on deductibility of tIRA contributions if you are not covered by a workplace retirement plan (which I believe is the case?)

And there is no such thing is a deductible IRA. An IRA can have a basis from non deductible contributions. IRAs are not deductible nor non-deducitble - the contributions are.

[beltim]

You have $100k in income over the $160-something thousand limit for the two of you and you only paid $800 in federal taxes?   Wow, your country of residence has remarkably similar taxation levels as the US.

My only suggestion would be an IRA but that's an obvious one and at $260k + income you wouldn't qualify for a deductible IRA.

What? There's no income limit on deductibility of tIRA contributions if you are not covered by a workplace retirement plan (which I believe is the case?)

This is a good point, although I would note that a foreign pension would count.

And there is no such thing is a deductible IRA. An IRA can have a basis from non deductible contributions. IRAs are not deductible nor non-deductible - the contributions are.

This is pedantic.  What I wrote was a shorthand for "wouldn't qualify to deduct IRA contributions."

Also, somehow I missed the part in the OP where he said the school would probably do the IRA contribution.  What do you mean by that? 

[johnny847]

And there is no such thing is a deductible IRA. An IRA can have a basis from non deductible contributions. IRAs are not deductible nor non-deductible - the contributions are.

This is pedantic.  What I wrote was a shorthand for "wouldn't qualify to deduct IRA contributions."

Also, somehow I missed the part in the OP where he said the school would probably do the IRA contribution.  What do you mean by that?

To people who understand the shorthand, it certainly seems pedantic. But one of my friends who recently started making enough money to be subject to the tIRA deduction limit was under the impression that he would need to create a new IRA and designate it as a non-deductible IRA if he were to continue to make tIRA contributions this year. It can be confusing for people who do not understand what the shorthand truly means, which is why I avoid using such shorthand in a forum where people with various levels of knowledge read my posts.

Also, somehow I missed the part in the OP where he said the school would probably do the IRA contribution.  What do you mean by that?

I missed this too, +1 on the question. Employers cannot make IRA contributions on your behalf (with the exception of SEP and SIMPLE IRAs I think?).

[Cathy]

... one of my friends who recently started making enough money to be subject to the tIRA deduction limit was under the impression that he would need to create a new IRA and designate it as a non-deductible IRA ...

Pursuant to 26 USC § 408(o)(1), taxpayers may make "designated nondeductible contributions" to an IRA. According to 26 USC § 408(o)(2)(C), a "designated nondeductible contribution" is a contribution that has been designated, in the manner prescribed by the Secretary of the Treasury, on the individual's return of tax for the year as being a nondeductible contribution. An individual making such a designation must include on her or his return certain information, including but not limited to "[t]he amount of designated nondeductible contributions for the taxable year": 26 USC § 408(o)(4)(B)(i). So nondeductible contributions do need to be specially designated, but this as done as part of the tax return and not through any special process with the IRA trustee or custodian (*).

(*) The general rule under 26 USC § 408(a) is that an IRA must be a trust, so "trustee" would be the applicable term. However, 26 USC § 408(h) provides that instead of an actual trust, an IRA can also be a "custodial account", subject to the requirements of that section. In that case, "custodian" is a correct term, although the statute says that "in the case of a custodial account treated as a trust ..., the custodian of such account shall be treated as the trustee thereof", so "trustee" is always correct but "custodian" is only sometimes correct.

[SunnySaver]

My wife and I are administrators at an American School overseas.  When she was an administrator and I was a teacher, we never had to pay any taxes because we were always below the Foreign Earned Income Credit threshold.  Now that we are both administrators, we have exceeded the limit by nearly $100,000 (as the IRS considers housing, and other benefits as taxable).  We also made some rental income off of our property in Colorado.

You mean Foreign Earned Income Exclusion, right? After you pass that threshold, you may qualify for the Foreign Housing Exclusion, although that only lets you exclude expenses above a base amount (approx $16k last year). If you're being taxed on housing benefits, those employer-paid amounts are probably covered by the Foreign Housing Exclusion; you also include things like utilities in your housing expenses.

My question is, how do I shelter more money so that I do not have to pay the $800 in Federal taxes and $100 in state taxes again.  I guess I could make a contribution to my IRA from India; the school would probably do it but I haven't dealt with this before.  What are some other ways that I could shelter the cash?

You can contribute to an IRA, but remember that excluded income isn't considered earned income, so make sure to check your allowed contribution after taking your exclusions. I'm not sure what the school has to do with it, though, as you make those contributions yourself.

Otherwise, I can't think of any obvious ways to shelter additional overseas income. If you earn more than you exclude, you pay tax on it. If you are also paying tax to India on non-excluded income, of course you can take that as a credit or deduction.

I wonder about this as well... I am thinking about teaching English in Korea and I am not sure how the taxes work when you do that. Do you pay taxes in the country you work in, the country you are a citizen of, or both? And I'm sure the rate must be different as well?

If you are a US citizen or resident alien, start with IRS Pub 54. You are liable for US taxes on your global income. This is unusual, and a disadvantage for Americans working overseas. You are also generally liable for taxes in the country where you work.

How do you invest when you work abroad? I would want to continue to fund my Roth IRA, but how in the world would that work? If Roths are funded with after-tax money, wouldn't you have to pay some kind of USA tax first? I am so confused.

IRA contributions are covered in IRS Pub 54. As I mentioned above, you use non-excluded income to calculate your allowed contribution. There's nothing special about taxable investments, as dividends and capital gains are not earned income that you can exclude.

[pappyvanwinkle]

I said IRA, but what I meant was something like a 403(b). In that case, I think the school would have to deposit the funds directly in the account (on my behalf) before it ever made it to my checking account.  My employer pays all local taxes on my behalf.

[SunnySaver]

I said IRA, but what I meant was something like a 403(b). In that case, I think the school would have to deposit the funds directly in the account (on my behalf) before it ever made it to my checking account.

403(b) is a plan offered by an employer, and generally it must be available to all eligible employees. If your employer offers a 403(b) plan, I believe you can participate from overseas.

If your taxes are on income above the foreign earned income/housing exclusion limits, a 403(b) contribution should help you reduce that remaining taxable amount. It won't help you avoid tax on the base housing amount for the foreign housing exclusion, though.

You also mentioned rental income from Colorado in your first post, and I don't think a 403(b) contribution would help with that because it's not excludable foreign earned income; only reducing the taxable rental income, e.g. via depreciation and deductions, would help with that.