Discussion:401k distribution claimed as foreign earned income

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Discussion Forum Index --> Advanced Tax Questions --> 401k distribution claimed as foreign earned income


Discussion Forum Index --> Tax Questions --> 401k distribution claimed as foreign earned income

J lyday (talk|edits) said:

3 December 2010
My client has lived and worked outside the US for many years. However he is paid by a US company that issues a W-2 and set up a US based 401K for him, even though his income is foreign earned and declared on the form 2555 - typical ex-pat scenario. He wants to roll over the 401K to a Roth-IRA. Since the contributions to the 401K were foreign sourced income, could distributions from the 401K be considered foreign income and claimed on the form 2555? Has anyone found a specific reference that dis-allows or prohibits this? This one's got me scratching my head. Thanks for any input.

Lizzit (talk|edits) said:

3 December 2010
The contributions made during a period of foreign residency are indeed foreign sourced.

However, the 2555 allows only the income from the current year (e.g., his 2010 wages on his 2010 2555) and the previous year (e.g., his bonus from 2009 on his 2010 2555) to be claimed. The previous year's income could prossibly include the 2009 and 2010 contributions to the 401k that are now being rolled over in 2010, as the contributions represent earned income. You can only include Earned Income on the 2555. It might be stretching the defintion of earned income too far, but I can't see any reason not to try. Because it's only current year and the one previous and it's limited to Earned Income, neither could you include the growth or the contributions for all the earlier years.

The contributions for 2009 and earlier years are still foreign sourced for purposes of filing Form 1116. He may have excess FTC's from the past which will be soaked up by this. Further, depending on the country he is living in, the entirety of a pension distribution may be re-sourced as foreign. You'll have to (a) tell us what country and/or (b) read the treaty for that country, INCLUDING it's "savings clause" which is a different Article to the pension article.

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the U.S. Internal Revenue Service, we inform you that any tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding tax-related penalties under the U.S. Internal Revenue Code or (2) promoting, marketing or recommending to another party any tax-related matters addressed herein.

Lizzit

R2 (talk|edits) said:

3 December 2010
John, any amounts received after the close of the taxable year following the taxable year in which the services to which the amounts are attributable are performed cannot be treated as earned income under Sec. 911.

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