Foreign Income exclusions –> interest income

Home Fairmark Forum Taxation of Investments Foreign Income exclusions –> interest income

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  • #3262
    Pamo
    Participant

    Hi everyone,

    My question relates to the relation between the foreign earned income exclusion and taxation of earnings from interest. I work overseas and my wages are covered by the foreign earned income exclusion, and I still have a capital loss carried over from previous years. Thus my AGI is effectively negative, before the deductions are even factored in.

    My question is about this versus any interest earnings. Would a negative AGI effectively counteract interest earnings (up to a certain point) so that interest would be untaxed? Or is there some rule that interest will be taxed at the rate that you would have earned if you didn’t have the foreign earned income exclusion?

    I can’t seem to find any information about this on the internet. Thanks in advance if you have any information on this subject! Appreciate any help you can give!

    #3265
    kaneohe
    Participant

    Your capital loss would be either 3K or your carryover…..whichever is smaller so I would think your interest could be that amount before the excess would start being taxed.

    • This reply was modified 2 years, 4 months ago by kaneohe.
    #3270
    Pamo
    Participant

    Dear Kaneohe,

    Thanks very much, that is very helpful… My capital loss carryover is the full $3,000.

    So the standardized deduction would not also counteract the interest income?

    #3271
    kaneohe
    Participant

    I was thinking the same thing but I got reminded by one article that the FEIE does not simply remove the FEI. I’ll have to search for that article but I think the way it works is you do two calculations:
    1) FEI only tax
    2)( FEI plus other income) tax
    3)subtract 1) from 2) ; this keeps the other income suspended at the higher tax rates. I guess I’m assuming here that your FEI > deductions.

    https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion

    “Figuring the tax: Beginning with tax year 2006, a qualifying individual claiming the foreign earned income exclusion, the housing exclusion, or both, must figure the tax on the remaining non-excluded income using the tax rates that would have applied had the individual not claimed the exclusions.”

    • This reply was modified 2 years, 4 months ago by kaneohe.
    #3273
    Pamo
    Participant

    Hi, thanks, yes, this is starting to get to the core of my question. It’s exactly as you are discussing it:

    1) is the tax on interest effectively the tax rate on your income AFTER the FEI is deducted, (which would often be zero or a much lower rate), or

    2) is the tax on the interest the rate you would have paid if the FEI was not deducted?

    I think you are saying in your most recent post that the tax rate is what you would have paid, as if you had not been able to deduct the FEI. I.e., if my tax rate would have been 25% on my wages, then the tax rate on the interest would be on top of that (probably 25% but could also increase into a higher tax bracket).

    Am I understanding you correctly?

    Thanks for your time to help with this issue…

    #3274
    kaneohe
    Participant

    Yes, I believe we are in agreement w/ that IRS link. Your FEI is at the bottom of the stack, other income is on top. The FEIE eliminates the tax on the bottom stack but that FEI income stays there as a placeholder to determine the higher rates on the top stack of other income.

    Somewhere in the IRS forms/instructions there should be some words describing the mechanics of doing the calculation more explicitly.

    • This reply was modified 2 years, 4 months ago by kaneohe.
    #3276
    kaneohe
    Participant

    here it is : p. 39 of the 1040 instructions is a FEI wksht
    https://www.irs.gov/pub/irs-pdf/i1040gi.pdf

    #3280
    Pamo
    Participant

    That’s great, thank you for all your help and explanation. That’s exactly what I was looking for. Very much appreciated!

    #6677
    Lewis-H
    Participant

    If you are a U.S. citizen or a resident alien of the United States and you live abroad, you are taxed on your worldwide income. However, you may qualify to exclude your foreign earnings from income up to an amount that is adjusted annually for inflation ($103,900 for 2018, $105,900 for 2019, and $107,600 for 2020).

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