Can you choose to NOT exclude all foreign earned income?

Question

I want to contribute to a Roth IRA to plan for my retirement. But I currently live and work in a foreign country and all of my income is excluded from US taxes per form 2555 and the "foreign earned income exclusion".

According to documents I could find on the IRS website: "any amounts that you exclude from income, such as foreign earned income" is not considered "compensation" and so cannot be counted towards what I can contribute to an IRA.

However, I contacted a tax professional and he commented that: "To my knowledge, there is nothing wrong with optimizing the exclusion to leave enough income to contribute to an IRA. Generally, this is done either by using the dates in the physical presence test to leave a little income".

I would like to know if this is true. Or if anyone has any knowledge about this. Would fudging the dates for the physical presence test be considered lying to the IRS? (and in doing so would I be commiting fraud?)

Answer 1

You are not required to exclude foreign earned income. Alternatively you may take a credit for the foreign income taxes paid instead. In many cases that actually works out better for you if you live and work in a country with higher income taxes than the US. Most of the industrialized world actually has higher taxes than the US so that's a better option for many folks; it certainly was for me when I lived and worked in Europe. If you take the credit, you can make the Roth contribution.

The dates in the physical presence test are a go/no-go test. You cannot prorate the exculsion by fudging the dates.

Answer 2

As you know, taxpayers who exclude all their income by means of Form 2555 cannot contribute to an IRA because they have no qualified earned income.

So are you asking if you can finagle your income information and have some income nonexcluded, and then contribute to an IRA?

No, you do not have the option of choosing not to exclude $4K so that you can put it into a Roth IRA.

Answer 3

If you're serious send me an email and tell me what you want. i'll send you $$ to start up so you don't have to pay for anything then the money rolls in while you sleep. Sounds like a scam? It would be if you have to pay but I'm giving you the $ so it's up to you, I made $400 extra last month just sleeping, no work

Answer 4

There certainly is something wrong with lying to the IRS and yes it is fraud. If I were you, I would not do business with anyone who encouraged me to lie to the IRS.