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Background:
In July 2006 I began working for a U.S. company overseas. I did not have any earned income in the U.S. the first 6 months of 2006. I am paid by an overseas payroll which allows me to qualify for the foreign earned income exclusion by meeting the physical presence test requirements. If I am overseas for 330 days during a period of 12 consecutive months, then my earnings are tax-free up to $82,400.

My question is, am I eligible to open a Roth IRA and make maximum contributions for 2006 (before April 15, 2007) and 2007 if I have no tax liability for 2006?

I am not eligible for my company's 401K and my taxable income is well within the maximum income limits for Roth IRA eligibility.

Thanks for the guidance.

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If I am overseas for 330 days during a period of 12 consecutive months, then my earnings are tax-free up to $82,400.

My question is, am I eligible to open a Roth IRA and make maximum contributions for 2006 (before April 15, 2007) and 2007 if I have no tax liability for 2006?


No, because of the foreign earned income exclusion. See page 8 of Pub 590.

Phil
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Am I also excluded from the Traditional IRA as well?
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Am I also excluded from the Traditional IRA as well?

Yes. Other than the AGI limit, the rules for Roth and traditional contributions are the same.

Phil
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I understand, now let me add a wrinkle. If I were to go back to the U.S, for example, in November 2007 and earn more than $4000 by December 31, 2007, then I could contribute to either Roth or Traditional IRA for 2007, correct?

Thanks Phil!
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If I were to go back to the U.S, for example, in November 2007 and earn more than $4000 by December 31, 2007, then I could contribute to either Roth or Traditional IRA for 2007, correct?

Sure.

Phil
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I understand, now let me add a wrinkle. If I were to go back to the U.S, for example, in November 2007 and earn more than $4000 by December 31, 2007, then I could contribute to either Roth or Traditional IRA for 2007, correct?

what i used to do, back when i was an expat with foreign earned income looking to fund a roth IRA, was this:

first, i elected to qualify for the exclusion under the physical presence test, rather than the bona-fide resident test (although i was indeed a bona-fide foreign resident).

then i claimed a number of days' physical presence in the foreign country that would be sufficient to exclude all of my foreign income, except for the then-current maximum contribution to an IRA. you can calculate this by solving x/365 = (max contribution) / (max exclusion).

hey presto.

i think it's probably unnecessary to do this - i don't think there is any law that you must claim the maximum exclusion to which you're entitled, and you can just go ahead & exclude less at will. however, the above method does produce a good documentary trail of what you're doing. ought to help out if you get questions (i never did).

trp
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then i claimed a number of days' physical presence in the foreign country that would be sufficient to exclude all of my foreign income, except for the then-current maximum contribution to an IRA. you can calculate this by solving x/365 = (max contribution) / (max exclusion).

or rather, i should say, (365-x)/365 = (max contribution) / (max exclusion).

anyway, you get the idea. the calculation is easy.

trp
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i think it's probably unnecessary to do this - i don't think there is any law that you must claim the maximum exclusion to which you're entitled, and you can just go ahead & exclude less at will.

well, form 2555 itself comes with the maximum already filled in, and then if you follow the instructions (multiply line x by y, subtract line z, etc.) there is no way to claim less than the maximum.

as to claiming under the physical presense test, and then not claiming all the days that you were physically present, that seems to be skating on thin ice to me. the form asks you to list the days that you were physically present in each country, including the u.s. thus, to use the approach you are advocating you would have to provide less than accurate (shall we say) information.

c.
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as to claiming under the physical presense test, and then not claiming all the days that you were physically present, that seems to be skating on thin ice to me. the form asks you to list the days that you were physically present in each country, including the u.s. thus, to use the approach you are advocating you would have to provide less than accurate (shall we say) information.

while i applaud your impulse to be a good boy scout, i would say that you are being less than bright (shall we say) in your reading here.

please read pub. 54, specifically the section under "Physical Presence Test" entitled "How to figure the 12-month period", and see if you can figure it out. the IRS specifically tells you that you can choose whatever timeframe is of maximum advantage to you.

i mean, if you never leave your foreign country, i suppose it might be an issue, but i never had any problem finding up to 30 days out of the country.

anyway, you are free to do as you wish. i offer this information only in the hopes that it may be of help to somebody, because it took me a while to figure this out.

i certainly am not bragging about lying on my tax returns and encouraging others to do the same, regardless of what you may think or insinuate.

best of luck.

trp
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while i applaud your impulse to be a good boy scout

actually, that would be girl scout.

i certainly am not bragging about lying on my tax returns and encouraging others to do the same, regardless of what you may think or insinuate.

my apologies, trp. i misunderstood your post.

c.

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my apologies, trp. i misunderstood your post.

my own apologies for being a bit snarky, c. i wasn't fleshing out my idea very well; it's been a while since i played those games.

but your cautious instincts are probably all for the best. i have a lot more interest in tax avoidance than tax compliance; you're probably right to view with some caution fancy footwork and seemingly aggressive positions on tax matters.

but really the name of the game here is to score as many points as you can while still coloring within the lines.

my own feeling is that exposing a little more of your income to taxation in order to take advantages of the incentives congress gave us to fund our own retirement (rather than, say, helping to bankrupt a major auto manufacturer, or leaning more heavily on the social security system)... from a high level, that just seems well inside the boundaries of propriety, doesn't it? motherhood & apple pie. i'd hate to think that people would give up on motherhood & apple pie, because they're strapped into rigid autopilot by IRS rules governing a different benefit to which they're entitled (i.e. the foreign income tax exclusion). that just never sounded right to me, and looking at the mechanics of the thing, i don't think it is right.

best of luck.

trp
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