What abour a U.S. taxpayer with only foreign source wages?

[Guest kje]

What about a 23-year-old adult, U.S. citizen who is working for a foreign company outside the United States for all of 1998 and earns overseas more than $2,000 but below the amount that would trigger any U.S. tax liability on earnings. As a result, the wages are not subject to U.S. tax and not included in AGI on the individual's 1040. (This person still files a U.S. tax return because of some interest, dividends and capital gains.) Assume further that AGI (both as reported and adjusted to include overseas earnings) is low enough that this person could clearly set up a traditional IRA or a Roth IRA if the wages had been earned in the U.S.

Question: Can this person make a 1998 contribution of $2,000 to either a Roth IRA

or a traditional IRA?

[Guest REMCPA]

Yes. Assuming that the taxpayer is single, and earns less that the foreign earned income exclusion, and has $5,000 of other AGI, the full $2,000 Roth IRA contribution can be made. The limitation is determined by the following formula: $2,000 (max contrib, less than compensation) reduced by $2,000 multiplied by the ratio of: AGI minus $95,000 divided by $15,000. This ratio is zero ($5,000 AGI - $95,000 is zero, divided by $15,000 is zero) Thus, $2,000 time zero is zero. The max $2,000 contribution is reduced by $2,000 x zero, or zero. Therefore, the full $2,000 can go to the Roth IRA.

[Guest REMCPA]

As long as AGI is less than $95,000 for a single taxpayer, there would be no reduction of the maximum $2,000 Roth IRA contribution, as long as the taxpayer's compensation is more than $2,000 - even if all of the compensation is excluded because of the foreign earned income exclusion.

[Guest kje]

To REMCPA, the only thing I have difficulty with in your answer is your statement that the taxpayer must have $5,000 of other AGI. The individual of whom I'm speaking does not have this much other AGI. But the "ratio of: AGI minus $95,000 divided by $15,000" will be zero whether AGI is $5,000 or zero or $95,000. Would appreciate clarification.