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Topic: 2555 vs tax credit  (Read 907 times)

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2555 vs tax credit
« on: April 04, 2015, 12:16:41 AM »
I have been filing for years using 2555EZ since our joint income is below the threshold. I am now thinking of using the tax credit route instead so that I can stack credits for the future.

1) Is there a reason not to use the tax credits and stick to 2555? I understand I cannot switch back for five years. My understanding is that since my UK taxes are higher than anything I would have to pay in the US, I will still owe nothing.
2) Can I apply the credits I stack to any US income I might receive were I to move back to the US?

Thank you


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Re: 2555 vs tax credit
« Reply #1 on: April 04, 2015, 10:15:26 AM »
1) It's likely you would still owe nothing, but there's no guarantee depending on various scenarios. On strictly earned income where UK tax is withheld, it's probable you would still owe nothing, but UK tax free allowances enter the picture. If (UK) earned income is in the area of $10,000 to $20,000 a year with UK personal allowances resulting in £0 or a small amount of UK tax paid, FEIE will probably give a more satisfactory result. If the UK income is in the area of $50,000 and above, FTC (1116) will likely give a satisfactory result.

There are no hard rules, one must run the figures both ways to be sure, but if using FTC, the 5 year rule on switching back to FEIE does apply.

2) NO, POSSIBLY, MAYBE, PERHAPS.

Be sure you understand the "baskets" associated with FTC, and the rules applying to carry forward/carry back. Passive FTC's can not be used to offset General Limitation (earned) income nor Resourced income, and vice versus.

FEIE is generally seen as an easier method for those on lower incomes. When incomes are greater, FEIE can become more complicated and FTC usually gives a superior result when the income is from a country with higher tax brackets (like the UK).

EDIT TO ADD:
Using the FTC method opens up investment opportunities in the US (IRA, ROTH) which are unavailable when using FEIE. Perhaps someone better qualified to speak of these will respond. 
« Last Edit: April 04, 2015, 10:47:00 AM by theOAP »


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Re: 2555 vs tax credit
« Reply #2 on: April 04, 2015, 03:34:50 PM »
+1 to theOAP's comments.

Regarding the ROTH. If you use FTC method you will show earned income on your 1040 and qualify to make ROTH or IRA contributions. The ROTH is probably the easiest as you use after tax money, can get at your contributions after 5 years and withdrawals from it are both US and UK tax free. However, if you don't already have a ROTH or a very good relationship with a US based finance company or bank you will find it hard to open a ROTH account.


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