overseas US citizen and IRA

[Mr Mark]

Hi Mustachian Tax gurus,

My DW is a US citizen resident overseas, with a little bit of cash income. Given she's earned well under the foreign exclusion limit does she need to declare that cash income, and if she does can she then contribute to her IRA and deduct that?

[rpr]

I'm not a tax adviser but my understanding is that a tax return must be filed if income exceeds certain thresholds.  These thresholds have nothing to do with FEIE. These thresholds apply to all US filers irrespective of where they live and depend on filling by status. See, for example,

https://www.americansabroad.org/us-taxes-abroad-for-dummies-update/

[Derbtax]

Yes, she has to file to claim the foreign earned income exclusion.  She'll file a Form 2555 with her return to claim the exclusion.

She can contribute to an IRA if she has earned income that is not excluded. For example, if she earns 65,500 but only excludes 60,000, she can put the 5500 into a traditional or Roth IRA. Probably a Roth since she's probably in the 0% or 10% bracket after excluding that other income. Note that the excluded income still counts toward the modified AGI limits on contributing to an IRA.

[EricEng]

Kind of curious, but why would you want to do that?

The IRA will get taxed later, but she could get it tax free now for life if she's not using the full foreign income exclusion.