US Taxes - Compare Tax credits Vs Foreign Income Exclusion

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PlanningtoR2I
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US Taxes - Compare Tax credits Vs Foreign Income Exclusion

Post by PlanningtoR2I »

Vivmat/RRk/Bobus,

There are 2 methods to calcuate the taxes after R2I

Method 1) The Foreing Earned Income Exclsuion Method(which has had recent chnages about the way the tax needs to be computed)
Method 2 ) The foreign tax credit method.

Is the xls and all the tax deductions/exemptions being discussed in this thread related to using Method 1?


Admin added:
This post moved from following thread. The excel file referred can be found in
IRA Withdrawal strategy for USC-R2I
Bobus
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Joined: Mon Jan 15, 2007 11:26 pm

US Taxes - Compare Tax credits Vs Foreign Income Exclusion

Post by Bobus »

#49:

Yes, the excel sheet uses the foreign earned income exclusion (per new rules) and not foreign tax credit. Tax payer can use the method that is more advantageous. The foreign tax credit method is not more advantageous when other income (other than foreign earned income) is equal to or less than std deduction plus personal exemptions, which is the case in the excel sheets.
RRK
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US Taxes - Compare Tax credits Vs Foreign Income Exclusion

Post by RRK »

#49,
Yes, we are only looking at exemption. In addition to the reason Bobus given, I think it is fairly straight forward compared to credits.

The only catch with FEI exclusion is person has to be living outside US for more than 330 days to be eligible. Say an USC is working in India and the company sends him to US for projects more than 35 days in a calendar year, he will be in trouble to claim FEI exclusion.
PlanningtoR2I
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US Taxes - Compare Tax credits Vs Foreign Income Exclusion

Post by PlanningtoR2I »

What if one has a sizeable amount in their 401k .Like around 250k or so?And if one also assumes that bith husband and wife would be working in India(with combined salary around 20-25 lakhs). In this case would foreign tax credit be more advantageous?Is foreign tax credit approach a complicated one?
PlanningtoR2I
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US Taxes - Compare Tax credits Vs Foreign Income Exclusion

Post by PlanningtoR2I »

I do not want to hijack this thread but if i would like to discuss taxing options using both FEI method and tax credit method ,would it be better if I start a new thread.
PlanningtoR2I
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US Taxes - Compare Tax credits Vs Foreign Income Exclusion

Post by PlanningtoR2I »

Before getting around to doing a full blown xls with all the bells and whistles wanted to make sure that I am getting the basic tax calcuations right.
Attached is an xls for MFJ+1 where I have attempted to compare US taxes during the first year of RNOR using both methods(foreign income exclsuion and foreign tax credits methods).

In case of the tax credits method , I calcuated the US tax on the worldwide income and then subtracted the dollar amount of indian taxes paid. I have also assumed that Indian taxes would be roughly 33% on the Indian income.


Since I am finding a substantial amount of tax savings using the foreign tax credits method, I am not sure if am totally wrong in my calculations or whether the substantial difference is for real!
Bobus
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US Taxes - Compare Tax credits Vs Foreign Income Exclusion

Post by Bobus »

#6:

I have glanced at your excel sheet and find that there are errors under both methods. Will elaborate later. The exercise you are engaging in is a good one i.e. given new FEI exclusion rules, it pays to compare the two methods and choose the one that is more advantageous.

-----------

Added Later

(a) First, a minor point, but I will make it nevertheless. It helps to be explicit about which year's tax rates are being used in the sheet. Looks like it is 2007 graduated tax rates that are being used. Check

http://www.smbiz.com/sbrl001.html#pis07

Std deduction plus PE for MFJ+1 in 2007 is 10,700 + 3,400 * 3 = 20,900 and not the 20,500 in Cell B7

(b) Regarding Cell B11: The tax on the foreign earned income (under new FEI rules) is calculated assuming that taxable income (different from gross income) is equal to the foreign earned income. So jump directly to graduated tax table and figure tax on the FEI assuming it is equal to taxable income. No std deduction or PE to be subtracted. Also, dont know why you have added the 10% tax (penalty) on IRA withdrawal when computing tax on FEI. Accordingly, the formula to be used in B11 ought to be 8,772.5 + 0.25*(B2-63,700) which yields 9,097.5

Incorporating the above will yield a US tax liability of $17,525 under the FEI exclusion method.

Regarding the foreign tax credit method:

Will not get credit from the IRS for the full amount of taxes paid to GOI on the FEI. After all, US rate of tax is lower. Please check Pub 514 - figuring out the foreign tax credit will take some time - it aint straightforward.

http://www.irs.gov/publications/p514/index.html
Jaggudada
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US Taxes - Compare Tax credits Vs Foreign Income Exclusion

Post by Jaggudada »

Could you please explain the constants you have used in your XL? Some of the constants are not self explanatory. Also don't know source of India income, if it is salary then isn't it excluded upto $80K?
Bobus
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US Taxes - Compare Tax credits Vs Foreign Income Exclusion

Post by Bobus »

#8:

Please read the description in Cell A2 of the excel sheet regarding your query about what type of India source income is being dealt with. Further, FEI exclusion limit is also subject to actual foreign earned income, not merely the max limit of $80K+.

Regarding constants, they are std deduction and personal exemption amounts for MFJ+1 in 2007 - other constants are from MFJ graduated tax table for 2007.
Jaggudada
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US Taxes - Compare Tax credits Vs Foreign Income Exclusion

Post by Jaggudada »

This is what I got. Not sure if this is correct. Experts can comment.

I apologise I didn't change the standard deduction amount and you can not detach and attach the excel document but overall you get the idea as the difference won't be much.
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