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US Citizen - FEIE, MPF and IRA Question

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  1. #1

    Join Date
    Dec 2009
    Posts
    99

    Question US Citizen - FEIE, MPF and IRA Question

    With the Foreign Earned Income Exclusion (FEIE): Foreign Earned Income Exclusion one can exclude "the first $105,900 of foreign wages or self-employed income is excluded from U.S. federal income taxes as of the 2019 tax year."

    I am a US citizen, and receive salary compensation from a local employer. I also pay into the MPF through my HK employer.

    I claim as much as I can through the FEIE, but I am still slightly lower than the FEIE limit for my local wage income.

    Is it possible to exclude only a portion of my wage income on the FEIE and pay some extra US taxes on some of my foreign wage income? And then used that US taxed earned income in order to contribute to a US retirement plan?

    For example, say equivalent of $100K USD earned in Hong Kong through employer. I claim for FEIE exclusion $94,000 USD. But the $6,000 USD I don't claim.

    Can I use that $6,000 foreign earned income (not excluded) for a ROTH IRA or Simple IRA contribution?

    In other words, is the FEIE claim all-or-nothing, or can I partially claim a portion of my foreign earned income?


  2. #2

    Join Date
    Dec 2009
    Posts
    99

    Lightbulb MPF is a non-qualified pension for US Citizens

    From a post by scootercat: https://geoexpat.com/forum/175/threa...ml#post3148997

    KPMG did our taxes for 3 years (employer paid) then I took over using Turbotax and using all that I learned from KPMG's detailed calculations.

    MPF: This is treated as a non-qualified pension, i.e. taxed at standard tax rates.
    All money that employer contributes, plus any gains is added as "wages" on 1040. How calculated: Vested balance from 12/31 of current year minus vested balance of 12/31 of previous year (losses are a little more complicated).
    All gains from employee contributions are taxed the same but are reflected as "Other Income" on 1040.
    Since the MPF is an unqualified pension (according to scootercat and KPMG), then the MPF contribution is actually added as wages on the Form 1040.

    Can one claim or not claim this Form 1040 wage under FEIE exclusion?

    Also, any gains in the MPF fund (each year, or when withdrawn after 65 years of age) "are added as wages on 1040." Does this mean that MPF gains each year are taxed? What if there are losses on the MPF fund holdings-- are those considered negative wage income on the 1040?

    Here is some more information about unqualified foreign retirement plans:

    https://www.greenbacktaxservices.com...t-us-taxation/

    Currently, the following tax treatment applies to foreign pension plans:

    Contributions – Since foreign pensions aren’t qualified plans, employee contributions do not reduce the employee’s taxable US income, and employer contributions to a foreign pension fund increase the employee’s taxable income.
    US Taxation – With certain US qualified pensions, income accrues tax-free; however, foreign pensions are treated as income of the participant subject to taxes annually. In some cases, this is punitive if the foreign plan fund invests in foreign mutual funds or exchange-traded funds (classified by the IRS as passive foreign investment companies, or PFICs).
    Double Taxation – Foreign pension fund distributions are taxed by the US and the country of residence, which in many cases, you can avoid by claiming a Foreign Tax Credit. However, under US law, you’ll end up paying taxes twice on foreign pension accounts – when they accrue and when they are paid out. Note that tax treaties exist between some countries, which makes it easier for Americans to participate in foreign pension plans without incurring double taxation.
    The reporting requirements for foreign pensions are often complex, as additional requirements may exist on top of reporting employer contributions to foreign pensions and income earned from the pensions on your US tax return. You may also need to utilize the following forms, depending on your specific situation:
    Form 3520 – required if you have any transactions with a foreign trust
    Form 3520-A – required for trustees, and includes information the grantor needs to file Form 3520
    Form 8621 – required if PFIC rules apply
    Form 8938 – required for reporting on all foreign financial assets, including foreign pensions, if you meet the filing threshold
    FinCEN Form 114 (aka FBAR) – fulfills the reporting requirement of foreign bank and financial accounts if you meet the filing threshold
    Bloody hell... can it get any more convoluted... shoot me now.
    Last edited by balancedequatio; 25-10-2019 at 10:42 AM. Reason: added more information
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  3. #3

    Join Date
    Aug 2011
    Posts
    5

    I would be careful doing that because Form 2555 (FEIE) pg. 2 says to report "...all income...". If you report less, then you technically would be lying to the IRS! Pub 590-A, Pg. 6 specifically says that FEIC is not compensation for IRA contribution purposes so I'm not sure a way around this. You wouldn't actually pay any tax on the $6,000 you left out of the FEIE as the standard deduction would wipe it out anyway so the whole thing looks suspect.

    balancedequatio likes this.

  4. #4

    Join Date
    Aug 2011
    Posts
    5

    MPF/ORSO Contributions and gains from an employer are added to income on Form 1040, Line 1 (Wages, salaries, etc.) as "non-qualifying income" as shown on my KPMG "Allocation of Income" statement. They are not included in the Foreign Earned Income section on Form 2555, pg. 2. Thus they are not considered for FEIE.

    Gains from the employee portion (employee contributions are already taxed as wages) are included as "Other Income" on Form 1040, Sch. 1, Line 21 which is where the FEIC is added as well. So gains on the employee portion of the MPF/ORSO reduce the FEIE.
    Notice I mentioned gains from employer and employee above. This is because KPMG used "mark to market" accounting which means I pay income tax on any unrealized gains every year. With respect to losses, you must offset the losses with gains from previous years. So if your total gain from previous years was $1,000 and then you have a $1,200 loss, you can only claim a $1,000 loss and carryover the remaining $200 loss to the next year.

    The double taxation issue from Greenback tax services mentioned above is worrisome. I'm paying tax every year on employer contributions & gains and employee gains so I would be quite dismayed if I had to pay tax again once I received distributions from the pension.

    And as for forms like 3520 and 8621, I've looked into that a lot (and KPMG didn't use them) and figured I don't need them for MPF/ORSO. But it's been 10 years since KPMG did my taxes so I can't be 100% sure. It's so complicated that I can't imagine IRS coming after me and I do pay mark to market taxes every year.Finally, I do report the MPF/ORSO amounts on Form 8938 (for FATCA) (only need to use Form 8938 if you meet reporting thresholds) and on FinCEN Form 114.

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