All of my income is tax exempt due to the fact that I live and work overseas and my income is exempted by the Foreign Income Exemption Allowance giving me no taxable income?

My employer is offering an 8 percent matching benefit which must be placed into a bona fide retirement vehicle like an IRA or TSA.

Can I put money into a retirement plan like a TSA or IRA if I have no taxable income. If not, what other options do I have?

I have been told there is a loophole in the tax law that allows a Roth IRA annuity contribution. Is this correct?

Thank you!

Luke

We've gotten a terrific answer here from a Tax Pro in Portugal.

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Dear TaxMama,

This is for the reader working overseas.

Be careful to note that the $80,000 you are not taxed on is an exclusion, not an exemption. Exempt income (e.g. capital gain of $250,000 on the sale of a personal residence) is not even put on your 1040.

Excluded foreign earned income however, is posted on line 7, and then immediately deducted on line 21 by placing the amount in ( ) and writing "form 2555" next to it in the white space. Be sure you take your housing exclusion also if you qualify. See Pub.593 for details.

The critical point here is that excluded foreign earned income and the housing allowance are added back in to your Adjusted Gross Income to give you something called MODIFIED Adjusted Gross Income.

For a traditional IRA the excluded income is not considered compensation. For Roth IRA's the case is different. Roths are based on modified adjusted gross income. If you are married and file jointly you can earn up to $160,000... if you are single or head of household you can earn up to $110,000 to make the contribution of $3000,($3500 if over 50 years old).

See Pub. 590, p. 48, table 2-1 for more details.

Be sure to go to the IRS site and download Pub. 54 "Tax Guide for US Citizens and Resident Aliens Abroad."

This is a great service you perform Eva.

Best regards,
Roger B. Adams
VECTA-Lisbon
adams.family@mail.telepac.pt

VECTA is the acronym for Volunteer Embassy and Consular Tax Assistance. It is the overseas equivalent of the VITA (Volunteer Income Tax Assistance) & TAE(Tax Assistance for the Elderly) programs run by the IRS in the States.

Our mission is to provide expert tax preparation help for US citizens, lawful permanent residents, and non resident aliens living without the USA. You may find this hard to believe, but we do about 1000 returns a year, working from February-June. It is entirely free to the taxpayer.

There are five of us working out of the US Embassy in Lisbon. I am one of the senior members. Naturally, all our issues fall into the area of taxpayers overseas. All day long we deal with 2555's, foreign tax credits(1116's), W-9, W-8BEN, W-7 and stuff like that that you don't see much of in the USA. On top of that are a lot of treaty based issues that the non resident aliens bring us. Lots of §871 stuff; and the occasional estate problem. It is my pro bono effort.

The lady responsible for the program works from the US Embassy in Paris. Her name is Marty Sartipi Marty.M.Sartipi@irs.gov

[TaxMama says: If you're overseas and need help, you can contact Roger - adams.family@mail.telepac.pt - he's available for consultations.]