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Old 02-26-2012, 12:18 AM
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How to file income tax without foreign earned income?

Hello,
I have been traveling and working for the past 4 years without having been back in the US since I left, and have been claiming foreign earned income exclusion for the first 3 years. Last year however, I did not have any foreign income while living off of savings, but still have to file a tax return.

How do I file last year's income tax without revoking my choice of foreign earned income exclusion?

I expect to have foreign income this year, and do not want to have to revoke and then reinstate the exclusion.

Thank you
Thomas



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Old 02-26-2012, 09:16 AM
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“How do I file last year's income tax without revoking my choice of foreign earned income exclusion?”---->You can ONLY claim your foreign earned income exclusion credit as long as you have foreign earned income overseas, if not, you can’t claim your FEIE credit.However, as long as you pay tax(es) to foreign taxing authority(ies) overseas, you can claim your FTC on your US returns, I mean both federal and state returns by filing Form 1116 and reporting C on 1040 line 47 or itemizing your foreign tax liabilities on Sch A line as other income. In fact, only a qualifying individual with qualifying income may elect to exclude foreign earned income and this exclusion applies only if a tax return is filed and the income is reported. However, unless you claim your FEIE credit, then you can claim the earned income credit for that year on your US return.
“I expect to have foreign income this year, and do not want to have to revoke and then reinstate the exclusion.”----->No, you do nothave to revoke your FEIE credit. Just for a reference, you can revoke your choice for any tax year. You do this by attaching a statement that you are revoking one or more previously made choices to the return or amended return for the first year that you do not wish to claim the exclusion. Based on the current US tax laws for expats, many taxpayers (mainly those in high tax countries) may be better off if they "revoke" one of the main benefits for expats, the Foreign Earned Income and Housing Exclusions. the Foreign Earned Income and Housing Exclusions are not "optional". If you don't want to claim the Foreign Earned Income and/or Housing Exclusions (after you have once claimed them on a prior tax return), you may revoke them. Prior to the 2006 tax year, expats would deduct the exclusions and then calculate the tax on the remaining income, so you got to use the lowest marginal tax rates. As of 2006, you need to add back the exclusions before calculating tax, which means you generally "start" at a much higher marginal tax rate (the IRS calls this the "stacking rule"). Since Foreign Tax Credits are calculated based on average tax rates, but the income gets taxed at the higher "marginal" tax rates, you "lose out" when calculating you foreign tax credits if you use the exclusion (and have sufficient foreign tax credits).For example, a taxpayer in the Netherlands (without the 30% ruling) earning $200K might pay $75K in Dutch income tax. If they use the exclusion, their US tax would be (roughly) based on $200K - $80K = $120K (less deductions and exemptions). Let's say the "marginal" US tax rate is 30%, or $36K of tax before credits. The tax after credits would be zero and the Foreign Tax Credit Carryover would be $9K ($75K Dutch tax paid less $30K allocated to excluded income less $36K used as a Foreign Tax Credit. If the taxpayer did not claim the exclusion, the Dutch tax would remain the same, but the US tax would be based on $200K. In this case the "average" tax rate might be (again very roughly) around 25%, or $50K (this is lower than the first example because you get to use the lower tax brackets to calculate the average rate). After applying Foreign Tax Credits, the US tax would still be zero, but the Foreign Tax Credit Carryover would now be $25K ($75K less the $50K used as a Foreign Tax Credit).



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Old 02-26-2012, 09:34 AM
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Join Date: Feb 2012
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Thank you Wnhough for the detailed info and examples. I'll keep the difference between foreign exclusion and tax credit in mind for the future, but for the moment I haven't actually paid any foreign tax in the countries I've worked in because I fall under their low income thresholds.

But for the moment I was just confused about whether I would need to revoke the foreign exclusion if I stopped earning foreign income, and I guess from your reply, not filing an exclusion because of no foreign income doesn't require that I revoke it.

I was just under the incorrect impression that I would lose the exclusion if I stopped using it.

Thanks for clearing that up, I won't be including 2555 this year.



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