Last Thursday, the Crossborder Academy hosted an Open Virtual Classroom covering Coronavirus Tax Relief and 2019 US Tax Filing Tips for Americans in Switzerland. In this issue of CBP, we’ll share the answers to two of the questions we covered at the end of the webinar that were not included in the presentation:

  • Tips to minimize 2019 taxes
  • Taxation of Economic Impact Payments

If were not able to attend the presentation but are interested in the content, you can download the slides from our Home

Let’s begin with some of the questions we talked about on Thursday during the Open Classroom:

  • Tips to minimize taxes in 2019 and beyond:

No one likes to overpay taxes, and there’s no reason anyone should.

There’s isn’t a lot that can be done to minimize 2019 taxes, since we are already almost halfway through 2020, but there are still a couple of options open:

2019 IRA contributions can still be made, for example, and for some of you, they may reduce your taxes. The maximum amount that can be contributed to an IRA for tax year 2019 is $6,000 for taxpayers under age 50 and $7,000 for taxpayers over age 70.

Not everyone is eligible to make IRA contributions, and not all IRA contributions are tax deductible, so let’s go over those rules in general.

Who can contribute?

Any taxpayer with earned income can contribute. The IRA contribution is limited to the taxpayer’s earned income or $6,000 (or $7,000 for those over 50), whichever is lower.

What is earned income?

For purposes of IRA contributions, earned income is employment compensation. One easy way think about it is: did you pay social security taxes on that income? If you did, that’s generally earned income eligible to be contributed to an IRA.

Does it make a difference if I paid foreign social security taxes because I live and work abroad?

No! You can still make IRA contributions, most likely, even if you contribute to a foreign country’s social security system and not the USA’s.

Marina, you keep using words like “generally”, “likely”. Why is that?

Because sometimes you are not allowed to make contributions, even if you had earned income. Or the contributions may not tax deductible, so are not helpful in minimizing taxes.

When are contributions not allowed?

Contributions are not allowed when you have excluded all your income from taxation using the Foreign Earned Income Exclusion (FEIE). Only compensation that exceeds the FEIE limitation is eligible for IRA contributions.

For example: If you earned $70,000 and you excluded the entire $70,000 using the FEIE, you cannot contribute to an IRA. But if you earned $150,000 and excluded the maximum $105,900, you still have $44,100 left over above the excluded compensation, and this allows you to contribute to an IRA.

When are IRA contributions not deductible?

If you are an active participant in a US qualified employer retirement plan like a 401k or a 403b, your deduction is limited based on your income level. Higher income earners in this situation may not be able to deduct their IRA contributions, partially or fully.

For example, the income limitation for a single filer actively participating in a qualified plan, begins at $122,000 and completely phases out at $137,000 of income.

If you live and work abroad, you may participate in a foreign retirement plan. If you live in a country that does not have a tax treaty with the USA that allows you to treat your foreign retirement plan as the equivalent of a US qualified plan,  your participation in the foreign pension does not count against you for purposes of the income limitation, and your IRA contribution is tax deductive, regardless of your income.

If instead, you elect, under a tax treaty available to you, to treat your foreign pension as a US equivalent, then you are considered an active participant in a qualified retirement plan, and your IRA contribution deduction may be limited.

Keep in mind that the IRA contribution is unlikely to be considered tax deductible in your country of residence. In that case, make sure that it makes sense to make an IRA contribution.

If you don’t owe US tax, due to the FEIE or the Foreign Tax Credit, it’s usually not tax beneficial to make IRA contributions, and it may even by counterproductive. Making an IRA contribution could potentially turn after-tax income into income that is taxed again (double taxation!) when you start taking distributions from the IRA.

Normally, IRA contributions must be made by April 15th, but due to the tax filing deadline postponement, the 2019 deadline for contributions is July 15th.

Other potential ways to minimize 2019 US taxes is by making sure that you are taking advantage of every available tax credit:

  • Child Tax Credit
  • Additional Child Tax Credit
  • Dependent Care Credit
  • Education Credit
  • Adoption Credit

Since it would be too lengthy to go into detail about each credit, please refer to this IRS webpage to obtain more information.

Are Economic Impact Payments Taxable?

Many of you have received or will receive Economic Impact Payments under the CARES Act. Some of you have asked me if these payments are taxable income. For US tax purposes, the answer is no.

If you live abroad, your foreign country could potentially consider the EIP taxable. I believe this not to be a high risk, as the purpose of the payments is to provide financial assistance during a time of need. It wouldn’t shine a favorable light on the foreign tax authority to consider this assistance taxable.

I am aware of the Canada Revenue Agency, and the United Kingdom Inland Revenue, both expressly stating that they won’t tax the EIPs received by US citizens living in these two countries.

Hopefully, this will be the position taken by all other foreign tax authorities.

And with this, we finish issue No. 12 of CBP.

As always, don’t forget to share this newsletter with anyone who may find it helpful. Until next week,

Much love,

Marina