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Old 28.03.2012, 20:51
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For US citizens, foreign income exclusion

Hi, I'm working through my taxes and it looks like I'm going to get screwed.
I'm wondering if I'm doing anything wrong in the following situation. I'll
use round numbers to illustrate my point.

$200,000 foreign income
$100,000 foreign income + housing exclusion
---------------------
$100,000 taxable income

I don't have a lot of deductions to itemize so using just standard deductions
I'm still facing a tax bill of around $20K on a $100K taxable income that I
could not exclude. I read the previous threads on form 2555 and form
1116 but I'm still not clear on this.

I paid a lot of taxes in Switzerland. Should I still try to claim that as foreign
tax credit using form 1116 on the remaining $100K? The stuff I have been
reading online is confusing. There's some blurb about calculating the foreign
taxes that come from the remaining $100K. So if I paid $40,000 in Swiss
taxes for income of $200K, I can claim $20,000 on the $100K in Swiss
income that I could not exclude.

Anybody in a similar situation want to share what you did?

Thanks,
David
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Old 28.03.2012, 21:16
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Re: For US citizens, foreign income exclusion

Hi,
My wife is in a similar situation as a US passport holder and we have professional tax advisers do this (don't think they are particularly good) but yes. You can claim the swiss tax you paid on the portion of your income not excluded by the foreign income exclusion against the US tax liability for the portion not covered by the foreign income exclusion.

So basically you are up for the difference between the US tax rate and the Swiss tax rate on the second 100k or so and you are screwed because you are an American you pay all the same tax anyone else would in Switzerland and then some more to Uncle Sam.

The USA is the only country that does this to their expat citizens.
Brian.
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Old 28.03.2012, 21:42
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Re: For US citizens, foreign income exclusion

Of course you are sure you qualify for the income exclusion right? Since you're asking the questions you're asking I'm not sure you understand that it's not just a given.
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Old 28.03.2012, 22:26
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Re: For US citizens, foreign income exclusion

We paid $25k taxes to the US last year on similar income. It is what it is I'm afraid.
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Old 28.03.2012, 22:37
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Re: For US citizens, foreign income exclusion

If you claim the exclusion, assuming you are eligible, your foreign tax credits are reduced. It is not always best to claim the exclusion and housing as your tax credits are not reduced. Have you done an optimization calc??

Also, are you on paid or accrued method?
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Old 29.03.2012, 00:07
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Re: For US citizens, foreign income exclusion

Yep, and this is, in large part, why I turned down a six figure job is that my husband had one of those, too, so not only would we get the married with two incomes penalty, we'd get rodgered by the IRS and I'd be paying up the wazoo for child care, etc. It's funny math for employed married US women in Switzerland.

Get a pro as the only thing more inscrutable than US taxes is...well, I can't think of anything at the moment.
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Old 29.03.2012, 06:54
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Re: For US citizens, foreign income exclusion

Good point, I think I'll rerun through TurboTax by taking out the foreign income exclusions and use the foreign tax credits instead.

Thanks!
David

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If you claim the exclusion, assuming you are eligible, your foreign tax credits are reduced. It is not always best to claim the exclusion and housing as your tax credits are not reduced. Have you done an optimization calc??

Also, are you on paid or accrued method?
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Old 30.03.2012, 22:32
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Re: For US citizens, foreign income exclusion

To follow up to my own post. I think I have this figured out. I'm
posting this as FYI in case other Americans are searching for "2555"
and "1116" in the future.

Even if you're paying somebody else to do your taxes, I suggest that
you try to understand this basic scenario so that you know if your
accountant is doing it right. Using round numbers for simplicity.

Swiss Income: $200,000
Swiss Taxes paid: $40,000

You report your foreign income on Form 2555. If you use Turbo Tax
it will walk you through the steps of getting the Foreign Earned Income
Exclusion and the Housing Exclusion. You did that and come up with

Foreign Exclusions: $100,000

So now you're left with $100,000 in income that was not excluded. You
CAN use the foreign tax credit (Form 1116) together with the foreign
income exclusion (Form 2555). If you read publication 514 there is a
more complicated example of what I'm doing here. Combining the
exclusion with the tax credit.

Your foreign tax credit is:

$40,000 * ($100,000 excluded income / $200,000 total foreign income) = $20,000

On income of $100,000 that was not excluded, you end up owing
the IRS $25,000 for this example. Turbo Tax can calculate it for you in
detail depending on your marital status and number of kids, etc. you have
a credit of $20,000, so you total tax owed is:

$25,000 - $20,000 = $5000

That's the total tax that you owe.

The story doesn't end there. If you paid no estimated taxes during the
year and you waited until April to figure all this out, you will have to pay
PENALTIES. If you only owe $5000 the penalties are not that big. But
if you owe more, the penalties will be bigger.

So I advice you to do the calculations NOW for 2012 and pay the
estimated taxes.

I came to Switzerland in 2011. So this first year is a lot more complicated
than this example that I'm describing. You have to file an extension and
wait until you have been physically in Switzerland for 330+ days before
you can use all the exclusions.

But for 2012 and beyond when you're here year round, this basic scenario
holds true. Being able to combine the exclusion and the foreign tax credit
definitely makes a big difference.

I also ran the calculations in Turbo Tax by using only the foreign tax credit
and not take the exclusions. It turned out to be a bad deal for me. US
taxes goes up a lot when income is over $250,000. Once you start taking
the exclusion you cannot stop unless you want to revoke it and get into
all sorts of nasty problems with the IRS.

DavidSJC

Last edited by DavidSJC; 30.03.2012 at 22:46. Reason: minor mistakes
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Old 30.03.2012, 23:06
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Re: For US citizens, foreign income exclusion

DavidSJC, thank you for the example and the explanation. A question comes to my mind. Suppose that
1. You plan to stay in Switzerland for the rest of your life.
2. You still have 25 years to go before retirement.
3. You have to pay $5000 every year to the IRS (based on your Swiss job income).

That is $125,000 over the years.
If instead of sending $5000 every year to the IRS you invest the money at a safe 4% rate, you would pile up over a million dollars after 25 years. (Of course I am ignoring all sorts of details such as income tax on the gain from the investment...)

So why send money to the IRS?
Why not throw away your US citizenship?

Or is there something in it for you, such as Social Security benefits later in life? (Remember, we are assuming that you will never return to the USA).

Just wondering.
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Old 30.03.2012, 23:41
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Re: For US citizens, foreign income exclusion

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So why send money to the IRS?
Why not throw away your US citizenship?

Or is there something in it for you, such as Social Security benefits later in life? (Remember, we are assuming that you will never return to the USA).

Just wondering.
I can't answer for David, but I can answer as someone who for the last 20-some years has been cursing under my breath as I write that rather painful check to Uncle Sam every year.

Citizenship is not only about practicalities. Yes, the blue passport is a pricey little bauble. Yes, the current political climate makes me want to weep in despair. Yes, the ship o' state is lurching precariously, the country is a mess.

But it's my country - the country that nurtured me, educated me, gave me the ability to make something of myself. I'm certainly no flag-waving patriot - but to me citizenship is a matter of identity, a matter of the heart. I just can't walk away from that.

(As for the assumption of never returning... I'm old enough to have learned to never say never. )

So I keep writing those checks.
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Old 31.03.2012, 08:47
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Re: For US citizens, foreign income exclusion

Quebec, for myself, giving up US citizenship is definitely on the table and
is up for discussion in my family. It is a deeply personal decision for some.
But not for me.

US taxes can only rise in the future. There is a 15 trillion dollar debt that we
can never repay. One party thinks that they can tax the rich and fix the
problem. Another thinks that they can cut spending and fix the problem.
So we end up with doing nothing. It's a broken system. One that I would
likely walk away from as self-preservation instincts kicks in.

DavidSJC
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Old 31.03.2012, 08:57
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Re: For US citizens, foreign income exclusion

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So why send money to the IRS?
Why not throw away your US citizenship?
An important factor in this equation is whether you have a secondary citizenship to fall back upon.

For me, the question is also about my children -- even if I'm prepared to live a life abroad, I want to retain the ability for my kids to live & work in the US if they wanted to.
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Old 31.03.2012, 09:10
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Re: For US citizens, foreign income exclusion

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If instead of sending $5000 every year to the IRS you invest the money at a safe 4% rate, you would pile up over a million dollars after 25 years.
Replace "over 1 million dollars" by "over $208,000.00".
I did the original calculation with an annual contribution of $25,000.00 instead of $5,000.00. Oups.
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Old 31.03.2012, 09:17
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Re: For US citizens, foreign income exclusion

I find it strange (unfair? crazy?) that American citizens have to send checks to the IRS even when they never set foot in the USA.

My kids have dual citizenship Canada-USA. Two of them were born in the USA and spent their early childhood there. The oldest one is now almost 22 years old and is graduating (from a Quebec university) with a degree in electrical engineering next month. I figure that he should keep his dual citizenship for at least another 10 years, just in case he decides to take a job in the USA. But if in 10 years he has settled somewhere in Canada (say with a "permanent job", a house, etc.) then I do not see the point of a lifetime of filing tax returns to the IRS. Of course he won't owe anything to the IRS for many years to come thanks to the foreign income exclusion and the foreign tax credit (income tax is higher in Canada). But if he were to become very rich (unlikely with my genes), it might be a good idea not to have the IRS watching him...
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Old 31.03.2012, 09:53
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Re: For US citizens, foreign income exclusion

Meloncollie provides the most common type of answer.

There is this pride, this greatest country in the world BS etc, it is quite amazing how the IRS play on that. I think the attitude is changing, expatriation has significantly increased these last few years.
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Old 31.03.2012, 10:06
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Re: For US citizens, foreign income exclusion

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Meloncollie provides the most common type of answer.

There is this pride, this greatest country in the world BS etc, it is quite amazing how the IRS play on that. I think the attitude is changing, expatriation has significantly increased these last few years.
I think for Meloncollie, and certainly for others, it goes beyond simple pride. She is also being practical. She doesn't labor under the assumption that she will never return (as she said, never say never) and would like to keep her options open. I agree.

I've struggled with the same decisions, and being a dual US-EU citizen, I could give up my Blue pass without suffering any significant hardship. But there's a part of me that hesitates since that would be cutting the last tie that binds me to the Motherland and close off an avenue that I think I would come to deeply regret. Sure, there's a price to pay, but I have opted to continue paying it.
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Old 02.04.2012, 08:35
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Re: For US citizens, foreign income exclusion

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So why send money to the IRS?
Why not throw away your US citizenship?

Or is there something in it for you, such as Social Security benefits later in life? (Remember, we are assuming that you will never return to the USA).
Ironically, you can still receive social security benefits abroad, but not much else, ie. medicare, social welfare benefits, etc..

As for renouncing or relinquishing citizenship, it is at a all time high, surprise, surprise... I think most that plan to live abroad forever and have another nationality it is nearly a done deal for them.

Everyones situation is different or personal. I am responsible for an elderly relative living in the US, and anything can happen under the circumstances that may involve a long term care and oversight of medical proxy and the like. For situations like that, when having to stay in US for extended periods or at short notice, it makes more sense to keep the blue passport in my opinion. Thereafter, renouncing is planned.
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Old 02.04.2012, 08:46
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Re: For US citizens, foreign income exclusion

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An important factor in this equation is whether you have a secondary citizenship to fall back upon.

For me, the question is also about my children -- even if I'm prepared to live a life abroad, I want to retain the ability for my kids to live & work in the US if they wanted to.
If you give up your citizenship, it doesn't effect your children's.

Tom
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Old 23.12.2013, 03:55
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Re: For US citizens, foreign income exclusion

For U.S. citizens living and working in Switzerland, when you file your U.S. taxes, does your foreign tax credit include ALL taxes you paid in Switzerland i.e. on income and on wealth, or does it just include income taxes?
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Old 23.12.2013, 04:12
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Re: For US citizens, foreign income exclusion

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For U.S. citizens living and working in Switzerland, when you file your U.S. taxes, does your foreign tax credit include ALL taxes you paid in Switzerland i.e. on income and on wealth, or does it just include income taxes?
Wealth tax is not creditable, per Rev. Rul. 70-464.
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