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Greetings, Suella, and welcome. You asked:

<<I am a US citizen domiclied in the UK, working for a UK firm and paying UK taxes.

Could I/ Should I take out an IRA with a small US inheritance paying from the interest/or dividends earned and thus limiting my US tax liability? I do also submit a US tax return.

I have pondered over this for sometime and need to know if I am losing out on a useful investment/tax efficient break.>>

This subject comes up from time to time both on this board and on the Tax Strategies board. Contributions to an IRA must be made from earned income (i.e., wages from a job) that are subject to U.S. income taxes. Therefore, to the extent you report any of your foreign earned income on your U.S. income tax return, you may make a contribution to an IRA. OTOH, if you use the $75K exclusion and have no such income to report, than you cannot.

Some folks in your situation have reported that they exclude all income EXCEPT $2K. They then use the $2K they report on the U.S. return to support their IRA contribution. I suppose that's a valid approach, but I have no idea how the IRS views it and have seen nothing to indicate it works or doesn't work.

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