Here is a copy of my e-mail with the IRS...NOTE: Our response to your tax law question appears below. If you have additional questions on this or other general tax law topics, please return to our web site at: (http://www.irs.gov/taxlaw) to submit it. Please do not use your "reply" button to send a follow-up question.Dear Taxpayer:The information you gave us was not entirely clear. We would have no way of knowing whether your insurance company made a mistake regarding your withholding. If you have already filed for an extension, you may want to wait until you have received a corrected Form 1099B before you file your return. In any case, if your tax preparation software will not accept your 1099B withholding, you may need to file a paper tax return or a paper amended tax return.It is also not clear how you could have ended up with negative adjusted gross income, based on the information you gave us. Your excludable foreign earned income must be added into your gross income before it can be excluded. After your excludable foreign earned income has been reported on your Form 1040 on line 7 or 12, and then subtracted on line 21, your remaining adjusted gross income should reflect your US earned income, your interest and 1099B income.Once you have elected to claim the Foreign Earned Income Exclusion, you must utilize it to its fullest allowable extent in any year that you are otherwise entitled to claim it. If you fail to fully utilize your maximum allowable excludable income amount, this will constitute a revocation of the Exclusion, and this could jeopardize your right to claim the Exclusion in future years. This law generally makes it difficult to contribute to your retirement plan if you are claiming the Foreign Earned Income Exclusion, because you are required to have taxable US compensation in order to contribute to a retirement plan. Retirement plan contributions and the Foreign Earned Income Exclusion are mutually exclusive unless you have US source compensation, or, foreign earned income in excess of the maximum excludable amount.If you have not previously claimed the Foreign Earned Income Exclusion, you may need to carefully consider its value to you. You may also want to look into the possibility of starting a retirement plan in the country in whicn you reside.Recharacterizing your Roth IRA means backing out of the conversion from a traditional IRA to the Roth IRA. It is not clear that this would apply in your situation. For further information, refer to Publication 590, INDIVIDUAL RETIREMENT ACCOUNTS, on our web site.There is a 6% penalty for excess contributions to your Roth IRA. The penalty is reported on Form 5329, ADDITIONAL TAXES ATTRIBUTABLE TO IRAs, etc. Your Question Was:Question 1 (1099B) I am a US citizen residing abroad. Last tax year I received a 1099B from my life insurance company. The company demutalized and as a result I received a payment. The company witheld 31% since they did not have my social security number. They issued me a 1099B reflecting the witholding. Upon completing my tax forms (1040) I was unable to enter the tax witheld on the 1099B form. I am using Turbo Tax for the web, which according to Intuit, covers 1099B forms. My insurance company now seems to think they have made a mistake. They recently requested my social security number and implied that they will be correcting the witholding error. They also suggested that I will have to file an amended return. I just filed for an extension so that I can sort out these problems prior to filing. My question is what should I do with the 1099B form? Did my insurance company make a mistake? How should I report the income and witheld tax? Question 2 (ROT!H IRA contribution with negative?? income) I qualify as residing in a foreign company (under both tests). I did however, earn $2000 while in the US on a short vacation. Other than that $2000 I do not have any taxable income (other than a small amount of interest income and the aforementioned 1099B income). My foreign earned income is less than the exemption. Last tax year I made a $2000 contribution to my ROTH IRA. However upon completing my tax forms it seems that because I reside abroad and my income is relative low, I end up with a negative adjusted gross income for 1999. As a result I was not permitted to contribution to my ROTH IRA. My question is how can I contribute to a retirement plan, ROTH or otherwise? Turbo Tax suggested that I will have to recharacterize my ROTH. What is that? I also seem to have to pay a $120 penalty. What is the penalty? Do I have to take the foreign tax credit that makes my income negative? My bottom line is that I would lik!e to make my full ROTH contribution since I am not eligible for any other retirement program while residing abroad. Thank you for your assistance. Please e-mail me if you need additional information. IRS forms and publications may be accessed on our web site at the following address: http://www.irs.gov/forms_pubs/index.html or ordered through our toll-free forms line at 1(800) 829-3676 which is available 24 hours a day, 7 days a week, with 7-10 days delivery time.We are interested in your opinion and providing the best possible service to you. Please take a moment to answer our survey at: http://www.irs.gov/help/newmail/email-survey.htmlThis answer is based on our understanding of the facts you presented in your question. Omission of facts may affect the answer given. Here's a tip for navigating the IRS homepage. Use the "search" button at the bottom of the web page. Enter key words or phrases when the entry box comes up. It could help you find your answer immediately. EMPLOYEE ID: 28-23780 Mr. kolankiewicz Tel.:(787)759-5100 msg#: 637435
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