US Taxes tips & info - beyond the FEIE

Finance, Taxes, Banking, Insurance and Retirement
1
hi all,

as this was the first year I owed taxes to Uncle Sam, I spent quite a bit of time learning about US tax laws as they pertain to expats. I've put together some of my findings, in case it helps anyone. If you don't owe taxes after applying the Foreign Earned Income Exclusion, then there's no need to bother with any of this. However, keep in mind that the employer pension contribution (2nd pillar) should be added on top of our gross salary.

Tax forms are due June 15th for expats. However, if you owe taxes interest starts to accrue from April 15th. After June 15th, penalties also apply if taxes are due. Employer pension contributions should be added to gross salary. In particular: "...the pension contribution must be included as income, is not eligible for inclusion on the FEIE, nor can it be offset by foreign tax credit because no tax is paid on this contribution in CH. Your personal contribution, because it is in the Gross wage amount on your Lohnausweis, can be included on the FEIE." from Adam at US Tax Services ([email protected]) Taxes owed can be offset by the Housing Exclusion (in form 2555) and by the Foreign Tax Credit (form 1116) Although I did not declare the interest earned in my pension plan, there seems to be no consensus on whether or not it should be. I expect to pay the taxes on interest upon distribution, for better or for worse. It’d be helpful to include a basis with your records - a spreadsheet that keeps track of the pension contributions/interest that one's already paid taxes on. For every pension contribution/interest documented, include where it was reported (for example 1040 Line 7). As one could get a big payout upon retirement or on leaving Switzerland, this basis will help determine the portion that’s already been taxed by the U.S. (thanks again for this tip, JBZ) Expats should file Form 8938 (FATCA) if: “You are filing a return other than a joint return and the total value of your specified foreign assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the year; or You are filing a joint return and the value of your specified foreign asset is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year.” (this includes 2nd and 3rd pillar accounts) Form TD F 90-22.1 (FBAR) should be filed if combined assets are 10,000 USD or more. http://www.forbes.com/sites/robertwo...he-first-time/ Due June 30 separate from tax forms (and different address). FBAR and FCAT details: http://www.irs.gov/Businesses/Compar...R-Requirements

Here is my interpretation of how the above is applied when filling out the forms, the parts that tripped me up at first:

f1040, Line 7: Salary should include employer pension contributions (2nd pillar.) So in the yearly Salary certificate, the Company pension plan regular contributions, should be added to the gross salary.

f1040, Line 21: Maximum foreign earned income exclusion (FEIE) + housing exclusion.

To figure out this sum, fill out form 2555, including housing exclusion if necessary:

f2555, Line 28: sum of rent, utilities (excluding telephone and cable), and any property insurance.

f2555, Line 29b: 39,219.00 (for Zurich, 2013)

f1040, Line 47: Foreign tax credit

To find this credit, fill out form 1116:

f1116, Line 12: r × foreign taxes paid ( Line 8, form 1116), where r is given by:

r = (FEIE + housing exclusion + employer pension contribution*) divided by (f1116 Line 3e)

*adding the employer pension contribution here ensures that this amount is not offset by the foreign tax credit. Not sure this is the correct way to do this, but it made sense to me.

f1116, Line 18: the instructions on the form are incomplete if FEIE was used. I think this line should be f1040 Line 41 PLUS excluded income (f1040 Line 21 )

I used the yearly average exchange rate of 0.976 CHF = 1 USD http://www.irs.gov/businesses/small/...206089,00.html , in the tax forms, but used the less-friendly end-of-year IRS rate of 0.916 in the FATCA and FBAR, as the instructions for these forms specified that the end-of-year rate should be used.

Disclaimer: all of the above could be wrong! ...but it's how I completed the forms this year.

2
I think you have simplified things a lot. And everyone's situation will differ, perhaps drastically from yours.

A simple thing to point out you cannot use the foreign tax credit against income you have already excluded with the FEIE.

Not everyone is eligible for the foreign housing exclusion, nor the FEIE.

3
Who isn't (other than those who don't pay for their own housing)?

Tom

4
Those who do not meet bonafideresident test or physical presence test, which is can happen in the first year overseas, but is often met the next year and a special extension can be filed for those cases.

Housing is only worth it if it exceeds the limitation circa $15k, and also limited to region allowances.

But yeah, most people would qualify for it, and if not, can in time.....

5
Anyone who pays less than 15k/annum probably doesn't earn enough to top out the FIEE, so no matter.

Tom

6
good overview for the most part - however, for the above, it is just Line 41 from the 1040, since you have excluded that income and it is therefore not taxable.

Foreign source taxable income / worldwide source taxable income * US tax liability = foreign tax credit OR foreign tax paid and available for credit (whichever is smaller).

7
Not always the case, sometimes you have a married couple where the spouse is NRA and therefore 50% of the housing expenses do not qualify, unless of course the US taxpayer is the sole breadwinner and paying all the expenses.

8
Is that true? I spoke to the IRS about this, and was told that as long as you pay the housing expenses (rent, utilities, etc) you don't need to be the sole breadwinner.

9
Well if husband earns the money, wife is stay at home mum but is the American filing her tax return for some investment income and what not, she can't claim the 30,000 housing expenses paid, she doesnt earn any money.

I guess their could be an argument if the expenses came from a joint account to which, from the IRS point of view, joint accounts are equal ownership of the assets.

So not sure if my first post was clear enough, but the point I was making was that the US taxpayer can't claim expenses to which they did not pay or to which 50% was paid by the spouse who is not American.

10
Yes, the confusion came from the claim that just because a US person is married to a non-resident alien, he or she can't claim 100% of the housing exclusion/credit.

As I understood, what can be done is that the wife, who works, pays rent and utilities, allowing her to take the income exclusion and the housing exclusion (and her husband, the non-resident alien, pays something else). In this scenario, the wife doesn't need to be the sole breadwinner or even the main breadwinner.

11
Sorry, yes, the point was as long as the US taxpayer has funded the expenses from their account or a joint one with the Non-US person. Thus, making the point that if your spouse, who is not American, pays 100% of the bills, but being married to them you will claim it as its a joint enterprise this marriage thing, then no, thats not allowed.

12
Is it also correct that the housing exclusion only applies when one is renting?

13
No, but it is rare to have the level of expenses above the circa 15K amount to get a deduction as a home owner.

Typically, the largest expense now is mortgage interest as an owner, and this is not allowed as housing expense, but as a Sch A itemized deduction.

The following expenses qualify for the foreign housing exclusion: Rent, Fair rental value of housing provided by the employer, Repairs, Utilities other than telephone, Real property and personal property insurance (homeowners & renters insurance), Occupancy taxes, Nonrefundable security deposits or lease payments, Furniture rental, Residential parking fees.

The following expenses do not qualify for the foreign housing exclusion: Lavish or extravagant expenses (as determined by a person's circumstances), Deductible interest and taxes (for example mortgage interest), Cost of buying property (for example, principal payments on a mortgage), Domestic labor (for example, maids and gardeners), Pay television, Home improvements, Purchased furniture, Depreciation of property or improvements.

14
If one replaces an old carpet with Laminat, is that a repair or an improvement or both or neither?

How far can one upgrade the TV until it becomes "pay television"? I understand "Pay TV" to mean Teleclub but not Cablecom's "Horizon Comfort".

15
Any kind of cable tv, additional to normal TV provided without a subscription package is pay tv per my understanding.

Good question on the floor. It could be argued either way, some carpets are more expensive than laminat, etc and vice versa. Could not necessarily say they add value to the home. If it were me, I would make a judgement call in light of the situation in the entirety i.e. depending on the overall return position and liability, which I guess does not help you.

Putting it bluntly, I don't think there is a correct answer to the conundrum.

16
So what the IRS needs to do is to specifically state that the foreign housing exclusion includes Billag but not Cablecom's Horizon Compact. Then, it needs to explain how renters are supposed to deduct the TV subscriptions which are packaged together with the apartment rental rates or homeowner annual fees. An individual might be paying a TV subscription without being aware of such. Sample documents need to be provided to show how an individual can respond to each unique situation.

Can internet still be deducted even when it is used to watch TV or make phone calls? One might get a more expensive internet plan with more bandwidth for better TV or VOIP usage. So, with the current system, an American could deduct much more by spending less! Obviously, one should also be able to deduct phone calls to the IRS, since the IRS doesn't provide a local number to dial and it is not uncommon to sit with the phone for hours waiting for the IRS to explain that they can't explain since they are not familiar with US tax code concerning the expat's tax situation.

17
No it doesn't. To most American's, I think, acknowledge what pay TV is, i.e. a luxury somewhat to those who can not afford pay TV. Billag licensing fees is different, that is utility expense which is mandatory. Cablecom, Swisscom or other are not mandatory.

Yeah most people take a percentage or divide by number of items on package, i.e. phone, internet, tv in one package, divide by 3? The IRS, for its flaws, expects some common sense from people and a bit of self thought. Afterall, it is a self assessment. If they disagree, they will tell you why.

I don't think any of the above contains a relevant sensible question.

18
Okay, I'm not a fan of the IRS, but I have spent some time on the phone with them and have had pretty good luck, actually. I never waited more than 10 minutes and their legal department was able to explain several things pretty clearly and seemed very comfortable with discussing expat tax issues.

19
I am a fan of the IRS and they are often fast and efficient in providing answers concerning US jurisdiction tax issues. Unfortunately, though, they are not capable of understanding all of the various tax issues outside of US jurisdiction, causing one to wait hours or even months for the answer to a simple question.

20
Then why bother filing when no interest exists in explaining how such is to be done?

Most Americans in America, absolutely! Most Americans in Switzerland, probably not. TV generally comes as a standard package with rentals, meaning that renters may not know that they have "pay TV", would not know how to cancel the subscription, may not even be able to cancel the subscription and are unaware that the subscription, who's amount is unknown, must be deducted from the monthly rate when reported as a housing exclusion.

I wouldn't be surprised if the vast majority of Americans in Switzerland are including "pay TV" with the rental rate when deducting such with the housing exclusion. As such, stateside Americans could easily define Americans in Switzerland as being "tax cheats", if they wanted to, and wipe out their life's taxed savings.

An American fresh in Switzerland won't have a clue about Billag, Cablecom, Swisscom or any of this, there is certainly no information to inform them about this, and you yourself stated that it is perfectly acceptable to not inform Americans about their filing requirements so that they are absolutely clueless when filing, if they even know that they have to file!

So, when audited, one can excuse errors by stating: "I used common sense"?

Explain. May an individual deduct the most expensive internet bill for the ultimate TV enjoyment and best phone experience?