Using FEIE (2555) & 1116

Following on from my other thread about Expat H&R block, they calculated 2 methods for my taxes it seems. The first, using standard 1116 for all of my combined income and total tax credited to reduce owed taxes to 0. As I have 2 USC children dependents, and MFJ, this gives additional CTC refund.

The second way was more sophisticated. This involved reducing my gross income for 2021 by applying a portion of income under 2555/FEIE, then the remaining through 1116 tax credits. This meant because I would be filing 2555 I could not claim the additional CTC, HOWEVER, what it has done is to reduce my taxable income down to below the threshold for Stimulus payment 3 eligibility.

As such, they now calculate I get a refund of 4 x $1400 (4 USC for household) as a rebate credit which is doubling my expected refund if I were to go 1116 route and get additional CTC alone.

My question is this seems like a loophole that makes some sense logically (with respect to it "working" using the strict criteria), however what I want to know is what are the downsides, if any, to using the FEIE on my 2021 return? I will not want to use it next year as there will be no rebate likely to apply for and I would want to claim the ACTC. I am unsure of the rules on switching between the two. When I first started filing, I exclusively used form 2555, but then in 2015 I realised the downside of this as I wasn't building up credits, and then subsequently couldn't get the ACTC, so I revoked the FEIE back in 2015 and have filed 1116 ever since exclusively.

Any thoughts on this? Many thanks in advance.

Don't forget that electing to use Form 2555 and then subsequently revoking it does require IRS approval - which for me is a means of inviting unwanted attention.

It probably requires some future year planning and not just an annual process.

I'd read and digest the following in detail (if of course you haven't done that already!) Good luck:

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

Don't forget that electing to use Form 2555 and then subsequently revoking it does require IRS approval - which for me is a means of inviting unwanted attention.

It probably requires some future year planning and not just an annual process.

I'd read and digest the following in detail (if of course you haven't done that already!) Good luck:

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

Thanks Smitch, this is my concern. If I go for the near term gain of a $5600 refund, I have to use the FEIE. I revoked this in 2015, therefore I am beyond the 5 yr period so my understanding is I do not need to request from the IRS permission to use FEIE this year.

However, I can imagine that come next year's filing (2022), I will not want to use the FEIE as I will not be able to apply for the additional CTC and receive up to $2800 in a refund. Therefore, I guess I would need to then next year revoke the FEIE to file purely on 1116 and qualify for the additional CTC. Is this how you would understand it?

Agree with your caution for opening yourself up for the IRS to dig deeper, especially as with foreign reporting so many things are subject to interpretation.

I have my own experience of the IRS digging deeper - and it is not fully over yet!

I made an error on my 2017 paper filing with form 6251 and the IRS responded with a circa $25k bill!. After I got back on my chair and double checked my original filing, I found the error and re-submitted a 1040X in February 2019 - which eliminated the tax owing and showed a circa $5k refund due.

Sadly, that wasn't the end of matters. The IRS opened up an examination and in March 2020 requested copies of a sale & purchase agreement of a UK company I had a 15% stake in (and which I had already paid UK CGT on the gain arising). The SPA was a couple of hundred pages long, so you can imagine what a can of worms that was, especially as it had potential deferred compensation on certain future hurdles.

Covid hit and delayed the whole examination, the IRS lost paperwork which I had to resend again and then they finally engaged in email correspondence - long story but they made several input errors into their own software when it came to FTC's and AMT FTC's. They finally advised in early December 2021 that they were now satisfied with my explanations and responses etc and the examination would be closed and I would receive the final report in writing - to date nothing further has been received. You can only imagine the turmoil and stress that the last 3 years have brought - I know that Covid has knocked the world for 6, but the antiquated processes that the IRS adopt has been something I have no desire to experience again.   

I guess the moral of my story is to tread carefully when you have an unusual 'tax event' or are taking an unusual stance that might invite further enquiries from those 'friendly' people across the pond - yes they have all been friendly as so many others have said, but there's that old saying about a wolf in sheeps' clothing!

Wow Smitch, that sounds like a nightmare.

The main thing that frustrates me to no end is the incompetence without consequence that often is observed. In your case, the amounts were much larger - the IRS losing key documents and info. In my case, much more minor as in last year they must have damaged my 8812 on scanning or processing my original, and so they changed my 1040 without telling me from my calculation of a $2800 refund to $0. No letter, just changed my 1040. I had to find out when trying to determine why I had not received a cheque. This is why I am determined to e-file where I can this year moving forward.

The thing that is also frustrating is if you get things wrong, they will charge you interest even when they take a long time to process. However, when they get things wrong, there is no consequence. They are also full of uninformed and generally incompetent staff IME. It is a hugely frustrating and antiquated system. It is perverse but I genuinely get a level of pleasure/satisfaction in doing my HMRC taxes online each year as the relative simplicity and ease in comparison is notable (and I do laugh at my UK friends who complain that self assessment is complicated!)!

@ukusjdd - thanks for your comments - the last sentence although written on tax deadline day makes me smile - yes the UK system is such a breeze - the IRS could maybe learn a thing or two if they could be humble and look at other tax regimes - too much pork barrel politics in the US I'm afraid. No taxing worldwide income might be a good start!(dream on me says!).

What is particularly worrying is that so many ordinary people don't understand the US tax system or the calculations (even at times,  tax professionals) and many would have accepted the IRS calculations, paid the bill and moved on. I knew they were wrong in 2017 (having paid a shed load of CGT to HMRC) and there was no way I was going to pay more again. I'd love to make a complaint to the IRS but am not sure if a) its' worthwhile or b) how to do it or c) will it be a red flag on my file for evermore?

Update on this:

I emailed the H&R block Expat support on reviewing my documents saying I had a problem, and my question was what are the disadvantages of filing the FEIE this year given that next year I would want to NOT file FEIE likely so I can claim the ACTC refund.

They finally responded and said,

"We would suggest not to go with FEIE for more refund for 2021 and again revoking the FEIE in 2022. However, it is your decision to choose the best option to go with FEIE or FTC in 2021."

I agree with this and am happy to go with half the refund amount for the long term gain and, as Smitch has evidenced with their own experience, avoid  inviting extra scrutiny of my returns and financial affairs from the IRS!

Fully agree @ukusjdd

My own experience isn't fully over yet!! I finally managed to get access to my on-line IRS account just a few days ago (using Id.me - follow the separate thread). I was then able to get a look at my 2017 transcript.

So my original 2017 return was filed by the October 15 2018 deadline. IRS issued their notice with a circa $25k billing, received by me in February 2018 (sent via usual IRS snail mail in December 2018). I knew something was clearly wrong, checked my return, corrected it and re-filed an amended return March 2019, with a refund due of circa $5k. September 2019 IRS open my return up for examination. - the rest of the story is documented earlier in this thread.

Having now seen my transcript - I followed up this week with email correspondence with IRS agent - why hadn't I received final advice of closure of my case and why weren't result showing on my transcript?. edited (and immediate) reply as follows:

The message (notice I am waiting for)  is a computer generated notice that is sent out when the adjustments needed for the case to close post to the account. At that point, there will be a code 421, which is the reversal of code 420, meaning the examination has been completed. We have no control of either the posting of these codes or the computer generated notices. I did review the account and it seems the adjustments have been input and should be posting by the end of next week.  So the whole examination process has taken nearly 2.5 years - 2.5 years of stress.

Now I work with computers every day - but a week to post adjustments that have already been input? - I guess someone needs to feed the IRS computers with quarters and wind them up again!

When everything is complete, I want to raise a complaint, especially given that my account has had a $25k charge (now up to $33k) sitting on it for over 3 years - you can imagine the distress that has caused. I'm unsure however of the IRS complaints mechanism and whether it will be worth it.