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US Citizen - FEIE, MPF and IRA Question

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  1. #1

    Join Date
    Dec 2009
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    297

    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
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    297

    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    Also, any gains in the MPF fund (each year, or when withdrawn after 65 years of age) "are added as wages on 1040."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
    shri and MABinPengChau like this.

  3. #3

    Join Date
    Aug 2011
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    7

    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
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    7

    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.

    shri, balancedequatio and LoganH like this.

  5. #5

    Join Date
    Feb 2012
    Location
    Park Island, Hong Kong
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    Contributing to an IRA in the US would be nice. What if your total 2019 is above FEIE? Let's say it's 5,000 above it for simplicity. Can you then contribute 5,000USD to an IRA?

    I already have a US Schwab brokerage account, but I'm not sure how an IRA works with foreign earned income.

    Also do reimbursed flights (leisure family travel) count as foreign earned income or should that be reported somewhere else to the IRS?

    I'm confused, do employee and employee MPF contributions count as foreign earned income (for the IRS)? Additionally, if the December 31st, 2018 market value is higher than the December 31st, 2019 (I think it was for HSBC's Hang Seng Index tracker fund), how can the losses be used?

    I've never needed to try to exclude more than the FEIE limit, but if flights and MPF (employee and employer) contributions count as foreign earned income I'll need to look at the housing exclusion (I pay my mortgage on my flat in HK.). I'm also interested in potentially not using anything but the FEIE limit and then putting the rest in a Roth or regular IRA, but I don't know how that'll work with foreign earned income above the FEIE limit.

    Also for FACTA this says that MPF accounts are exempt https://geoexpat.com/forum/155/thread352412-12.html (the FTSB document in my last post). But I also still haven't figured out how a TVC account will work for US citizens, and that's not for my 2019 US taxes, but I'd like to know to make an informed decision about whether a TVC account would be worth it for US citizens (the reporting requirements are unclear to me).


  6. #6

    Join Date
    Aug 2011
    Posts
    7

    If you take a look at pg. 6 of Pub 590-A, it describes compensation for IRA contributions. Excluded income is not included. So income you do not exclude can be used for IRA contribution. I don’t see anything else on pg. 6 saying otherwise. And there is no distinction made for income that is foreign. I have made backdoor contributions to Roth IRA every year since living abroad for last 12 years with foreign income (although since 2015, my income is on W-2 because it is a US company affiliate in HK).

    If your HK payslips or HK IR56B shows the reimbursed flights as income then it’s income for US, too. All goes on Line 1 Wages. Do you have to provide receipts for the flights (accountable plan) or do you receive cash with no receipts required (nonaccountable plan)? If it’s the latter, it’s income. If it’s the former, I’m not sure although considering it’s not a business expense reimbursement I would think that it would be considered income.

    Employer contributions and earnings (up to the vested limit) are income and taxable every year (mark to market on earnings…i.e., pay tax on gains even though you did not cash out). Employee contributions are made after tax, e.g. you have 50,000 HKD in taxable income for the month then you take 2,000 HKD and contribute it to MPF. You already paid the tax on the 2,000 because it is included in your 50,000 income. For mark to market on employee portion of MPF you would take the difference between the account balance from 12/31/18 and 12/31/19 and subtract any contributions you made to come up with the amount you need to report to IRS (I combine this with my FEIE amount as “other income” on 2019 Sch. 1 of 1040. FYI, earnings from employer vested amount are included with income on Line 1, Wages.

    I discussed losses in MPF/ORSO scheme in my last posting.

    I can’t comment much on a TVC account. But if you save on HK taxes then that sounds good. But, if you have higher earnings and use the Foreign Tax Credit (FTC)(Form 1116) then it might not help much. The money you save from lower HK tax is mostly offset by the lower FTC.

    LoganH likes this.

  7. #7

    Join Date
    Dec 2010
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    8

    It's tax season, been doing reading on MPF, Form 3520, Form 8938, PFIC/Form 8621 and FBAR

    I recently came across this enlightened article:
    https://www.castroandco.com/blog/202...SAAEgLMMvD_BwE

    It refers to IRS Rev Proc. 2020-17
    - In a nutshell, it seems to indicate that foreign pensions such as MPF that are set up to function as pension with tax deferral until withdrawal at retirement age, have tax advantages in the foreign jurisdiction, and limit your yearly contribution should now be exempt from the events requiring Form 3520 and eases your mark-to-market requirement (and a whole bunch of forms/time an accountant would charge you for)

    The rest of my takeaways:

    Form 8938
    - for most people won't be necessary, as only triggered if your MPF exceeds USD 50k, which is probably only likely with some combination of
    a) you've worked in HK for 20 years
    b) 1 of your employers had some furious matching policies
    c) you rode a nice bull market wave

    FBAR
    - you should report yearly as long as your MPF exceeds USD 10k

    PFIC/Form 8621
    - This one I'm a bit hazy on, but if KPMG didn't think MPF was a PFIC, that's good enough for me.
    And if you interpret the intent of new Rev Proc. 2020-17 would assume it should similarly nullify the 8621 requirement.

    Contributions from you/employer should be reported as income.
    Again, relating the mark-to-market, you would think this ruling should ease up on the need for that.

    And relating to the USD 1.2k stimulus, this site seems to indicate expats should get it, even if your AGI is artificially reduced/shielded by the FEIE. If you don't usually receive a refund and IRS doesn't have your bank info, technically should see a cheque in the mail?!

    https://www.myexpattaxes.com/coronav...ecks-to-expats

    My 2 cents.

    Morrison likes this.

  8. #8

    Join Date
    May 2020
    Posts
    60
    Quote Originally Posted by jeemtpe
    It's tax season, been doing reading on MPF, Form 3520, Form 8938, PFIC/Form 8621 and FBAR

    I recently came across this enlightened article:
    https://www.castroandco.com/blog/202...SAAEgLMMvD_BwE

    It refers to IRS Rev Proc. 2020-17
    - In a nutshell, it seems to indicate that foreign pensions such as MPF that are set up to function as pension with tax deferral until withdrawal at retirement age, have tax advantages in the foreign jurisdiction, and limit your yearly contribution should now be exempt from the events requiring Form 3520 and eases your mark-to-market requirement (and a whole bunch of forms/time an accountant would charge you for)

    The rest of my takeaways:

    Form 8938
    - for most people won't be necessary, as only triggered if your MPF exceeds USD 50k, which is probably only likely with some combination of
    a) you've worked in HK for 20 years
    b) 1 of your employers had some furious matching policies
    c) you rode a nice bull market wave

    FBAR
    - you should report yearly as long as your MPF exceeds USD 10k

    PFIC/Form 8621
    - This one I'm a bit hazy on, but if KPMG didn't think MPF was a PFIC, that's good enough for me.
    And if you interpret the intent of new Rev Proc. 2020-17 would assume it should similarly nullify the 8621 requirement.

    Contributions from you/employer should be reported as income.
    Again, relating the mark-to-market, you would think this ruling should ease up on the need for that.

    And relating to the USD 1.2k stimulus, this site seems to indicate expats should get it, even if your AGI is artificially reduced/shielded by the FEIE. If you don't usually receive a refund and IRS doesn't have your bank info, technically should see a cheque in the mail?!

    https://www.myexpattaxes.com/coronav...ecks-to-expats

    My 2 cents.
    Good lordy...so how exactly do we need to report MPF? Do I put employer's contribution on 1040 line 1 as wages? What about FEIE am I also able to use that to exclude tax on employer's contributions?

  9. #9

    Join Date
    Aug 2011
    Posts
    7

    Your employer contributions/gains can go on 1040, Line 1. Remember to use only vested balances. You might include this on a statement of income attached to your tax return:

    Here's a spreadsheet that shows how I keep track of the contributions/gains.

    As you can see, it's pretty simple for employer portion. Just find the difference in the entire vested employer account portion as contributions and earnings are all taxable (mark to market).
    As for employee gains (your contributions are already taxable as income by your company), these can go on 1040 Sch. 1, Line 8 (Other Income). For gains you just need to compare year end balances and subtract out the contributions you made. Just the gains are taxable (mark to market). The spreadsheet is just like the one above except the blank column includes the contributions which are subtracted out. This, too can go on a statement attached to your tax return. Note that the FEIE and HE are also included as "Other Income" and included here. Note there is both a personal MPF and a company ORSO scheme listed.


    With respect to employer contributions qualifying for the FEIE, I've never included it (KPMG didn't either back in 2007-9) and according to Form 2555 instructions, pg. 3, FEI does not include: "Amounts you must include in gross income because of your employer’s contributions to a nonexempt employees’trust or to a nonqualified annuity contract." Pub. 54, pg. 16 states a similar line regarding FEI that is not included: "Amounts you include in your income because of your employer's contributions to a nonexempt employee trust or to a nonqualified annuity contract." So I would say you can't include employer contributions for the FEIE.

    I don't think the complicated PFIC form or Form 3520 are needed for MPF/ORSO retirement schemes and as long as I pay the taxes mark to market then I think I have myself covered. But I am not an accountant so talk to a tax adviser if you need to.

    Taxmyass likes this.