Foreign income/residence: What amount is exempt, and how do I calculate my IRA contribution?

Question

I live in China. I earn 75grand/year.
I do not have a place of residence in the USA anymore
I do not pay any taxes to China, though maybe I should
I am self employed.
If everything I make is exempt from tax, how do I calculate my taxable income for IRA contributions?
Do I have to file if underthe exempt amount, and what forms do I use?
Thanks,
Daloong

Answer 1

The foreign income exclusion for 2007 is $85,700 which would exclude all of your income from ordinary income tax. You can still contribute to an IRA although you may wish to consider a ROTH IRA because you will have no income left to take the deduction of a Traditional IRA. To calculate your MAGI for the IRA you use worksheet 1.1 found on page 17 of IRS, PUB 590 ( the link below will take you to that publication). You will still file a form 1040 but when you get to the taxable income line everything will have been excluded. And you do want to file those returns unless you are very sure that you will never return to the US.

Answer 2

If you are a US citizen or legal permanent resident you are subject to US taxation on your world-wide income without regard to where it is earned or where you live. Whether or not you have a US residence is irrelevant.

If you exclude your foreign earned income on From 2555 or 2555-EZ, you cannot contribute to an IRA.

Since you are self employed your "exempt" amount is only $400. You must file the usual Form 1040 return along with Schedule C or C-EZ to figure your net profit and Schedule SE to figure your Self-Employment tax.

You may exclude up to $82,400 from Federal INCOME tax using Form 2555 or 2555-EZ or you may take a credit for the foreign income taxes paid using Form 1116. You may not do both, however. You must pay the Self-Employment taxes even if you take the exclusion.

As far as Chinese income taxes go, you do need to pay them. If you think that the IRS is nasty, you have no idea what nasty is. If you're a non-Chinese citizen on a work permit your income for the first 6 months is exempt but after that it's taxable back to day one. Don't recall what the rates are but you only get a small exclusion equivalent to the poverty level in China and that isn't much. For ex-pats, the rate quickly rises to 25%. I've worked in China but never stayed long enough on any single visit to have to pay any tax.