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Author: jackalope29 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121114  
Subject: NOT taking a tax credit Date: 6/14/2000 8:57 AM
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OK this might sound foolish (the bad kind), but please bear (or bull as the case may be) with me.

I reside abroad and my income does not exceed the foreign income exclusion. As a result I have no adjusted gross income from which to contribute to my Roth IRA. Being foolish (the good kind) I know the importance of contributing to an IRA. Thus, last year I returned to the US and earned $2000 in taxable income.

Great I can do my Roth. But alas, Turbo Tax calculates that I have a negative adjusted gross income since I qualify for some foreign tax credit (form 2555).

My question is can I just ignore this tax credit? I really prefer to make my IRA contribution. Also any help on this credit would be helpful. I just filled out the questions on Turbo Tax and it found this credit. Something to do with my low income abroad and housing credits???

Thanks
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Author: LoTax One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 36555 of 121114
Subject: Re: NOT taking a tax credit Date: 6/14/2000 11:31 AM
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1.) I don't see how a foreign tax *credit* would reduce your AGI... Is it really something else that's pulling your apparent AGI down?

2.) It's been suggested that someone in your situation can choose to exclude from gross income *less* than the maximum amount of the foreign earned income exclusion, thus leaving enough earned income to base an IRA contribution on.

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Author: Bob78164 Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 36561 of 121114
Subject: Re: NOT taking a tax credit Date: 6/14/2000 1:31 PM
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LoTax writes (in part):

I don't see how a foreign tax *credit* would reduce your AGI... Is it really something else that's pulling your apparent AGI down?

I reply:

I think he's referring to the foreign earned income exclusion. However, in answer to the original question, because he/she has $2000 in earned income that is not subject to the exclusion, I believe that he/she is eligible to make an IRA contribution, either traditional or Roth, even if his/her AGI is (somehow) negative. --Bob

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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 36576 of 121114
Subject: Re: NOT taking a tax credit Date: 6/14/2000 6:30 PM
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<<My question is can I just ignore this tax credit? I really prefer to make my IRA contribution. Also any help on this credit would be helpful. I just filled out the questions on Turbo Tax and it found this credit. Something to do with my low income abroad and housing credits???>>

As pointed out in previous responses, I think that you might be confusing the foreign earned income credit with the foreign tax credit. I think that your problem is with the foreign earned income exclusion, since (by definition) earned income which is allowed to be excluded is no longer earned income for IRA contribution testing purposes (both traditional and Roth IRA).

But, as was also pointed out, I personally believe that the foreign earned income exclusion is an election, and that you have the ability to exclude all of your foreign earned income except for the last $2,000. That will give you $2k worth of "earned" income which which to make an IRA contribution.

Other tax pros may disagree, but that's my story and I'm stickin' to it...until persuaded otherwise!! :-)

TMF Taxes
Roy

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Author: LoTax One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 36582 of 121114
Subject: Re: NOT taking a tax credit Date: 6/14/2000 7:46 PM
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I think either Jackalope must have some losses above AGI, or TurboTax isn't limiting his FEI exclusion(s) to the amount of his foreign earned income. How else would there be negative AGI?

Yes, it's earned income, *not* AGI, that limits his IRA contribution, but not knowing what's in his AGI, we shouldn't promise him the contribution. Say, for example, the negative AGI is caused by the $5,000 of U.S. business losses from that partnership he didn't tell us about. Then his earned income isn't the $2,000 he scored when he was in the States, it's a negative $3,000, and the contribution allowed is zero.

There is some confusion in his post between the exclusion and the credit, but that's only in the post, it's not in the TurboTax output.

The negative AGI is an indication that he has losses above AGI. Not knowing what they are, we shouldn't make any assumption about them, and....

...and the solution to his problem depends on why his AGI is negative, although the negative AGI is not, in itself, what's stopping his contribution to the IRA.

How about it, Jackalope, what negative numbers are there on your page one besides the FEI exclusion? Maybe a $3,000 capital loss?

--
LoTax



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Author: jackalope29 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 36603 of 121114
Subject: Re: NOT taking a tax credit Date: 6/15/2000 8:43 AM
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Thanks for the help. Let me see if I can be more concrete.

My tax consultant (Turbo Tax) came up with the following.

Form 1040 line 21 other income -9,000
Form 2555 is referenced here.

Form 2555 (Foreign Earned Income) line 26 shows the same figure but as a positive number.

However on a form called "Other Income Statement" that figure is entered as a negative number (the directions on the form seem to say that). Thus on this form the total (line 16) is a negative number.

What gives here? Thanks for any help.

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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 36635 of 121114
Subject: Re: NOT taking a tax credit Date: 6/15/2000 8:00 PM
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<<My tax consultant (Turbo Tax) came up with the following.

Form 1040 line 21 other income -9,000
Form 2555 is referenced here.

Form 2555 (Foreign Earned Income) line 26 shows the same figure but as a positive number.

However on a form called "Other Income Statement" that figure is entered as a negative number (the directions on the form seem to say that). Thus on this form the total (line 16) is a negative number.>>

Sorry...still confused.

If all you had was foreign earned income and a foreign earned income exclusion, you would likely have a positive amount on Line 7, a negative amount on line 21 (reflecting the foreign earned income exclusion), and AGI (line 32) of zero.

Which leads me to believe that LoTax is correct and you have some other stuff on your tax return...some other type of losses.

The additional problem is that TurboTax won't do you ANY good unless you know the rules and laws behind the forms. If you don't know how the rules and law is suppose to work, TurboTax becomes nothing more than a glorified typewriter.

That being the case, it's impossible to know what you might have input into TurboTax...and therefore why the output might look goofy to you.

About the only thing that you can do is break down the return line by line, and then we can tell you what your AGI should be...but perhaps not how to get there with TurboTax.

Good luck...
TMF Taxes
Roy



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Author: jackalope29 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 36649 of 121114
Subject: Re: NOT taking a tax credit Date: 6/16/2000 2:59 AM
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OK I will try again. I must have made a mistake somewhere in Turbo Tax.

And on the issue of taking part of the foreign income exclusion, according to the IRS it is not possible.
Here is the e-mail response I received from the IRS.

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.

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Author: LoTax One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 36662 of 121114
Subject: Re: NOT taking a tax credit Date: 6/16/2000 5:47 PM
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Can you give us the name/address of wherever the IRS response to your question came from, and also would you consider giving us a copy of what you wrote to them. This may lead to a resolution of this issue, or at least a good dialogue.

To paraphrase what Roy/TMF Taxes said on this issue: "that's my answer, and it's sticking to me."

TIA

LoTax

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Author: jackalope29 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 36667 of 121114
Subject: Re: NOT taking a tax credit Date: 6/17/2000 2:19 AM
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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.html

This 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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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 36705 of 121114
Subject: Re: NOT taking a tax credit Date: 6/19/2000 6:08 PM
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<<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.>>

Ignoring for a moment the remainder of the unclear issues in the e-mail from the IRS, this is exactly what I and LoTax were trying to point out to you. You must first add all of your income, then remove the foreign earned income. The difference would be your US income...which would also be your AGI (ignoring any other adjustments of course). If you are arriving at a negative AGI, that would indicate that you have other non-foreign losses somewhere else on your tax return. You add...you subtract...you arrive at zero.

So without going line by line on your tax return, it's really impossible to tell you why you are arriving at a negative AGI, nor is it possible to lead you in the right direction relative to turbotax.

Sorry...but there is just nothing here that I can help you with...

TMF Taxes
Roy



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Author: jackalope29 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 36756 of 121114
Subject: Re: NOT taking a tax credit Date: 6/21/2000 2:01 AM
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Thanks for the help so far. I agree I have an error in my calculation of my foreign earned income. I seem to recall something about a housing credit (since I pay for my own housing) but I doubt that is the real problem.

I am going to try again this weekend when I have a little time.

One point from the IRS e-mail is that you CANNOT take part of the foreign earned income exclusion. It is an all or nothing proposition. Bummer for us fools living abroad who wish to contribute to an IRA....

sam

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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 36776 of 121114
Subject: Re: NOT taking a tax credit Date: 6/21/2000 6:54 PM
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<<One point from the IRS e-mail is that you CANNOT take part of the foreign earned income exclusion. It is an all or nothing proposition. Bummer for us fools living abroad who wish to contribute to an IRA....>>

I certainly realize that was what the e-mail said. But you've gotta remember that the LAST place you want to go to get an interpretation on the tax code is the IRS. Many of their responses are incorrect (sadly), and they also have a personal bias with respect to the interpretation of the code (when it doubt, take the view that creates the most tax). It's not evil...it's just their job.

I remain of the opinion that the foreign earned income exclusion is an election...allowing you to elect all or part of your foreign earned income as excludable.

It wouldn't be the first time that tax pros disagreed on an issue. Taxes are more of an art than a science.

Hope you can get your problems resolved this weekend. And, yes, you may qualify for the foreign housing credit...but thats a completely separate issue from the foreign earned income exclusion...and a completely separate test. So don't let one issue taint the other.

TMF Taxes
Roy

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Author: jackalope29 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 36789 of 121114
Subject: Re: NOT taking a tax credit Date: 6/22/2000 1:04 AM
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Thanks again for the advice. I spent a little time last night on my taxes and quickly realized that I had not added in my foreign earned income before deducting it out (as you had suspected).

I made this error because I did not have a W-2 for my wages. I work for a small Japanese company which does not issue W-2s. How do I enter this income without a W-2?

Thanks

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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 36983 of 121114
Subject: Re: NOT taking a tax credit Date: 6/27/2000 6:33 PM
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<<I made this error because I did not have a W-2 for my wages. I work for a small Japanese company which does not issue W-2s. How do I enter this income without a W-2?>>

Throw it on Line 7 with an explanation on the tax return regarding no W-2 received. The folks at the Phily office (where you're required to file a return with a foreign address) are used to this type of thing.

Tell your tax program that they ARE wages, just don't complete any of the tax data that the computer will ask of you (such as FICA and income tax withholding).

TMF Taxes
Roy

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Author: jackalope29 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 37004 of 121114
Subject: Re: NOT taking a tax credit Date: 6/28/2000 5:22 AM
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Thanks again for the help! It is great being able to get "foolish" help when you need it. If I can ever return the favor...

I don't know much, but if you need info on Japan just ask.

sam

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