Foreign Earned Income Exclusion question

nelsona · Post by **nelsona** » Fri Feb 26, 2010 7:44 am

The correct way of determining if FEIE is worth it is to report all your income first without feie. Then claim feie. You will see that your tax will drop considerably.

lanman2000 · Post by **lanman2000** » Fri Feb 26, 2010 9:07 am

Correct. That is precisely what I did. My mention of a 10,000 reduction in refund was the difference between before I entered any foreign income and FEIE and after I did both. I'm doing this in turbotax so I get that realtime refund value...

The tax paid in Canada on all that income is > 10,000 so that should give me a bigger reduction in US tax owed if I run it through with FTC. No?

nelsona · Post by **nelsona** » Fri Feb 26, 2010 9:46 am

As I said, the best way to figure out which to do is to do it without regard for EITHER FEIE or FTC. This will give you your "normal" US tax.

Then run FEIE. This will determine what your exclusion is worth.

The $10K difference figure you mention is meaningless ,since it does not compare your entire income in both cases. Besides, how would applying FEIE result in a "smaller" refund? It should yield a bigger refund than if you did not apply feie. THAT is the figure you need to work with.

To repeat.

Fill your 1040 with ALL world income.
Use 1116 on non-wage income, since you have no choice to use FEIE on this. Determine tax.
Then:
(a)Fill with FEIE, determine tax
(b)Fill with FTC on wages, determine tax. Be aware that it is impossible for all the Cdn tax to be used as FTC.

Choose (a) or (b). Having run these for a few years, I'm pretty sure that FEIE in a split residence year will be best. It won't completely account for all Cdn tax, but it will be better than FTC, which is guaranteed not to use up all your Cdn tax.

nelsona · Post by **nelsona** » Fri Feb 26, 2010 9:49 am

It is usually very easy to toggle income from foreign to non-foreign, so it should not be difficult for yout FIRST enter your income. That is always the first step.

lanman2000 · Post by **lanman2000** » Fri Feb 26, 2010 10:11 am

Your explanation makes perfect sense. Ignore Turbotax until everything is entered b/c its a prelim estimate and can't possibly be the final amount when I still have a big chunk of income to add / attempt to exclude (either way pushing marginal rates higher...). I get it now. Thanks again for all the help.

jgoveas · Post by **jgoveas** » Sun Mar 21, 2010 8:28 pm

Ianman2000, I am in a similar situation. I returned to Canada and I want to use form 2555 to exclude my canadian income in the US, but don't meet the PPT for 2009. Did you end up deciding to wait to meet the 330 days before filing?

lanman2000 · Post by **lanman2000** » Sun Mar 21, 2010 8:41 pm

Actually we went with the foreign tax credits and it ended up being MUCH better. Make sure you run the numbers both ways or hire someone who can properly.

jgoveas · Post by **jgoveas** » Sun Mar 21, 2010 8:44 pm

Thanks for that! It would definitely solve the 330 day issue.

msp · Post by **msp** » Sun Mar 21, 2010 9:13 pm

Can I ask if both of you are running your tax credit numbers after or before you contribute your RRSPs? I.e. are your tax credits based on the refund/taxes you owe in Canada after or before you account for your contributions?

Thanks!

jgoveas · Post by **jgoveas** » Sun Mar 21, 2010 9:17 pm

hmm i didn't think we could make RRSP contributions as non-residents. so we didn't for last year.

nelsona · Post by **nelsona** » Mon Mar 22, 2010 5:34 am

its up to the rrsp manager. but the questio is why would you, except in the year of departure, since the tax savings are minimal otherwise.