US Citizen living in UK. Is it possible to do backdoor Roth IRA?

[dundee]

Hello,

My daughter lives and works in the UK. All her income in 2022 was in UK, she did not have a US W2 income. She is paying taxes in UK and filing returns in the US also.

Is she eligible to do Backdoor Roth IRA for 2022?

Thank you very much for your guidance.

[reeshau]

Is she using the foreign earned income exclusion, or foreign tax credit for her UK income?  If her 1040 shows earned income, she could contribute against that.  Whether or not she even needs a backdoor would be a matter specific to her numbers.

[dundee]

Thank you for the details. I guess I will have her talk with a tax person. She has a fairly high income, so, it will be backdoor Roth for sure.

[reeshau]

Well, the foreign earned income exclusion goes up to $112k for 2022.  If she earns more than that, she won't be able to take it.  For a high tax country like the UK, the tax credit can be more effective, anway.

Bottom line:  getting the taxes right will greatly overshadow the benefit of an IRA contribution--it's a side effect, not the primary goal to shoot for.  But if you or she had not considered this was a possibility, then by all means take advantage of the US's desire for global taxation to shelter some more money, in familiar ways.  :)

[Undecided]

Well, the foreign earned income exclusion goes up to $112k for 2022.  If she earns more than that, she won't be able to take it.

Why couldn’t she? That’s the maximum amount that can be excluded under the FEIE, not a qualification to using the FEIE.

I agree with your other points and would also say it’s important to understand how an IRA will be taxed by the other country (contributions, transactions, withdrawal of she’ll still be there then, and even holdings in countries that have a wealth tax)—I have no idea how the UK treats them.

[reeshau]

Well, the foreign earned income exclusion goes up to $112k for 2022.  If she earns more than that, she won't be able to take it.

Why couldn’t she? That’s the maximum amount that can be excluded under the FEIE, not a qualification to using the FEIE.

I agree with your other points and would also say it’s important to understand how an IRA will be taxed by the other country (contributions, transactions, withdrawal of she’ll still be there then, and even holdings in countries that have a wealth tax)—I have no idea how the UK treats them.

True, I did misstate that.  Still, the UK tax credit is likely to be more beneficial than FEIE if your income is above the limit.

[Undecided]

Well, the foreign earned income exclusion goes up to $112k for 2022.  If she earns more than that, she won't be able to take it.

Why couldn’t she? That’s the maximum amount that can be excluded under the FEIE, not a qualification to using the FEIE.

I agree with your other points and would also say it’s important to understand how an IRA will be taxed by the other country (contributions, transactions, withdrawal of she’ll still be there then, and even holdings in countries that have a wealth tax)—I have no idea how the UK treats them.

True, I did misstate that.  Still, the UK tax credit is likely to be more beneficial than FEIE if your income is above the limit.

On an ongoing basis, that's certainly likely, but twice in my life I've had stub years where I didn't become tax resident in my new country for the year of the move, but was able to use the FEIE (via the physical presence test) to exclude some of that year's income from US taxes. So perhaps at least worth being aware of.

[MustacheAndaHalf]

https://www.irs.gov/individuals/international-taxpayers/figuring-the-foreign-earned-income-exclusion

When I calculate the tax on $112,000 I get $20,715.50 or a combined 18.5% tax rate.  You could look at your local tax brackets, or compare against $20,715.50 to decide if you do better with a tax credit or foreign income exclusion.
https://www.nerdwallet.com/article/taxes/federal-income-tax-brackets

Also glad I read this thread, since I think I need to take a tax credit this year.  But my U.S. investment returns were rather substantial, so I hope there's no phase out.