Foreign Income Exemption (and 401k to roth rollover)

Hi, I am a US citizen that has been traveling outside of the country for the entire year of 2012. I recently got a work visa in New Zealandnand started working this month. I have not been in the US for the entire year, so I believe I qualify, but I have only been in New Zealand for 6 months of the year, the other 6 being in Fiji. Does that effect anything? I am single with no dependents.

Now for the second part, since I have no US income other than maybe a little investment income I am thinking of trying to roll over part of my old employers

401k into a Roth IRA that I have. Can I roll over some amount of this and still be tax free if I keep the amount under some limit, say the standard deduction? Something else? I don't necessarily need to roll this over now, but I figured being in a low tax bracket this would be a good year to move some of it over.

Thanks!

Reply to
Lauren Buchholz
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investment income I am thinking of trying to roll over part of my old employers

401k into a Roth IRA that I have. Can I roll over some amount of this and still be tax free if I keep the amount under some limit, say the standard deduction?

Assuming you're under 65 and not a dependent, the combined standard deduction and personal exemption is $9,750. You can have up to that amount of income and pay no Federal tax. Yes, converting some of your traditional IRA would be a great idea.

Phil Marti VITA/TCE Volunteer Clarksburg, MD

Reply to
Phil Marti

investment income I am thinking of trying to roll over part of my old employers

401k into a Roth IRA that I have. Can I roll over some amount of this and still be tax free if I keep the amount under some limit, say the standard deduction?

and personal exemption is $9,750. You can have up to that amount of income and pay no Federal tax. Yes, converting some of your traditional IRA would be a great idea.

Unless your retirement savings is so little that you'll only be withdrawal this "zero bracket" amount each year, I'd add the $8700 the the conversion. It will be taxed at 10%. A great opportunity.

Reply to
JoeTaxpayer

Thanks everyone, that is what I figured as far as the Roth rollover.

Can someone verify about the presence test for the Foreign income exemption? I just need to verify that not being in the US is sufficient and not actually being in the country where my income came from.

Reply to
Lauren Buchholz

Seems to me you qualify for the full exemption because the Tax home test allows you to be in any foreign country or countries.

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Bona Fide Residence Test To meet this test, you must be one of the following:

a.. A U.S. citizen who is a bona fide resident of a foreign country, or countries, for an uninterrupted period that includes an entire tax year (January 1-December 31, if you file a calendar year return), or

b.. A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country, or countries, for an uninterrupted period that includes an entire tax year (January 1-December 31, if you file a calendar year return). See Pub. 901, U.S. Tax Treaties, for a list of countries with which the United States has an income tax treaty in effect.

Physical Presence Test To meet this test, you must be a U.S. citizen or resident alien who is physically present in a foreign country, or countries, for at least 330 full days during any period of 12 months in a row. A full day means the 24-hour period that starts at midnight.

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It seems you can do this. It looks like a loophole, because perhaps the foreign earned income excluded should be added back when computing the tax on conversion income. That is, suppose your foreign income is 50k and your FEIC is 50k, so you no income. Then you can convert about 10k of IRA tax-free. But if you had taken the foreign tax credit, your AGI is 60k (with the rollover income), and thus the 10k rollover would be taxed.

Reply to
removeps-groups

Seems to me you qualify for the full exemption because the Tax home test allows you to be in any foreign country or countries.

BEGIN QUOTE

formatting link
Bona Fide Residence Test To meet this test, you must be one of the following:

a.. A U.S. citizen who is a bona fide resident of a foreign country, or countries, for an uninterrupted period that includes an entire tax year (January 1-December 31, if you file a calendar year return), or

b.. A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country, or countries, for an uninterrupted period that includes an entire tax year (January 1-December 31, if you file a calendar year return). See Pub. 901, U.S. Tax Treaties, for a list of countries with which the United States has an income tax treaty in effect.

Physical Presence Test To meet this test, you must be a U.S. citizen or resident alien who is physically present in a foreign country, or countries, for at least 330 full days during any period of 12 months in a row. A full day means the 24-hour period that starts at midnight.

END QUOTE

It seems you can do this. It looks like a loophole, because perhaps the foreign earned income excluded should be added back when computing the tax on conversion income. That is, suppose your foreign income is 50k and your FEIC is 50k, so you no income. Then you can convert about 10k of IRA tax-free. But if you had taken the foreign tax credit, your AGI is 60k (with the rollover income), and thus the 10k rollover would be taxed.

Reply to
removeps-groups

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