Foreign Earned Income Exclusion question

lanman2000 · Post by **lanman2000** » Tue Feb 09, 2010 12:58 pm

When does it make sense to file for an extension on the due date for filing with the IRS until you've met the physical presence test for the Foreign Earned Income Exclusion?

As far as I can tell it only makes sense when you're moving to a country that has generally LOWER taxes than the US. Otherwise just using foreign tax credits is perfectly fine for moves to higher taxed countries (eg. Canada) whether its a dual-status year or a full year in the new country.

Am I correct?

nelsona · Post by **nelsona** » Tue Feb 09, 2010 2:48 pm

I think you will find in a moving year, the tax credits don't work out very good, since your foreign income is added to the top of your income, while the credit is based on the average.

That is why it is almost always better to use 2555 in a moving year, whether entering US or leaving it.

FTC really works best when all the income is in one country or the other.

lanman2000 · Post by **lanman2000** » Tue Feb 09, 2010 5:42 pm

What if I don't meet either the bona fide or physical presence tests though? Doesn't that mean I cannot do the Foreign Earned Income Exclusion.
In 2009 I only had about 175 days in Canada and the rest in the US.

nelsona · Post by **nelsona** » Wed Feb 10, 2010 8:37 am

You said you would file extension. That is how it is done.

lanman2000 · Post by **lanman2000** » Wed Feb 10, 2010 9:46 am

Okay thanks. I'm planning on running the numbers both ways (with FTC and with FEIE) and whatever works best is what I'll do.

Thanks again for all your help. Its been invaluable.

lanman2000 · Post by **lanman2000** » Wed Feb 10, 2010 11:46 am

A follow up to this same question just came to mind. If I do choose to file for an extension for the US return until i've met the physical presence test then how can I complete my canadian return in time for the canadian filing deadline?

nelsona · Post by **nelsona** » Wed Feb 10, 2010 12:12 pm

In each case you need to send CRA/IRS sufficient money so as not to owe any tax. by the filing date.

Calculate what your US tax will be when all is said and done, and use that number.

Your Cdn return shouldn't have any US tax crediots on it anyways, should it?

lanman2000 · Post by **lanman2000** » Wed Feb 10, 2010 12:48 pm

It will actually because I am receiving US source rental income from my property down there. Also, I received some US unemployment insurance income while residing here in Canada and also that bankrupcty claim payout I asked the question about earlier. All of those I will owe US tax on and also have to declare as income on my canadian return. Thats another reason why i was thinking the FTC was a better option than FEIE for me for 2009.

nelsona · Post by **nelsona** » Wed Feb 10, 2010 1:50 pm

It probably won't be. FTC will be expedient however.

lanman2000 · Post by **lanman2000** » Wed Feb 10, 2010 2:04 pm

expedient is what i like... and i dont think i'll owe more using that method vs FEIE. I'll see....

thanks again for your help.

lanman2000 · Post by **lanman2000** » Mon Feb 22, 2010 3:01 pm

[quote="nelsona"]I think you will find in a moving year, the tax credits don't work out very good, since your foreign income is added to the top of your income, while the credit is based on the average.

That is why it is almost always better to use 2555 in a moving year, whether entering US or leaving it.

FTC really works best when all the income is in one country or the other.[/quote]

doesn't the foreign earned income exclusion have the effect of pushing your other income into a higher tax bracket that it normally would be in anyways?

nelsona · Post by **nelsona** » Mon Feb 22, 2010 6:05 pm

Yes, but this merely pushes it still below Cdn tax levels.

FTC on the otherhand pays off at US tax rates on income that was taxed at Cdn rates.

lanman2000 · Post by **lanman2000** » Mon Feb 22, 2010 8:25 pm

[quote="nelsona"]Yes, but this merely pushes it still below Cdn tax levels.

FTC on the otherhand pays off at US tax rates on income that was taxed at Cdn rates.[/quote]

so safe to say you firmly recommend i wait until the 330 days test is met and do the FEIE?

nelsona · Post by **nelsona** » Mon Feb 22, 2010 9:05 pm

In your arrival year and depaarture years, yes.

lanman2000 · Post by **lanman2000** » Thu Feb 25, 2010 11:12 pm

well i did everything with the FEIE and it reduced my federal refund by 10,000. That is, I put my Canadian income in the foreign earned wages section and then filled out the FEIE section and the final result was that all of the canadian incomes was excludable. I understand the marginal rate on the rest of my US income gets pushed up by adding in the foreign income but $10,000???? And its not a math error. I've done this 3 times.

Think I should give the FTC with the 3 iterations thing a whirl?