[dayzedconfuzed]

Having only recently found out that as US citizen, I was meant to be filing tax returns in the US, I am in the process of filling in my past year forms. I have got most of them done but have hit a small snag.

In 2007 the exchange rate was quite high - if the rate had not been so high I would not have this issue. After doing all my calculations I believe that some of my un-earned income from capital gains might push me over my combined standard deduction and exemption for that year. I haven't needed to include my health insurance or the car in other years but thought that they may help me here. I have the following questions:

Can I claim any deduction for self-employed health insurance if the self-employed income was outside the US and consequently I claimed the foreign earnings exclusion in respect of this self-employed income via form 2555?

Can I claim for the cost of a car (or part there-of) used in that same self-employed business, again when that business is outside the US and the earnings are covered by the foreign earnings exclusion?

Thanks for any help in advance...

 

[Bevdeforges]

Can I claim any deduction for self-employed health insurance if the self-employed income was outside the US and consequently I claimed the foreign earnings exclusion in respect of this self-employed income via form 2555?

Basically, no. Health insurance is only deductible as an itemized deduction (which means that, if you take the standard deduction, you can't deduct anything further).

The standard deduction is supposed to include all those things that people deduct on Schedule A if their itemized deductions exceed the standard deduction. It's an either-or situation and unless you have mortgage interest on your residence to deduct, it's rare that people have enough itemized deductions to bother filing a Schedule A.

Can I claim for the cost of a car (or part there-of) used in that same self-employed business, again when that business is outside the US and the earnings are covered by the foreign earnings exclusion?

No. In fact, if your business were a separate entity and was providing the car for you (as is common in many countries), you'd have to declare the fair market value of the use of the car for your personal use as additional income.

Don't forget, though, that if you paid UK taxes on your "unearned" income, you can take the foreign tax credit (form 1116) against any tax liability you wind up generating.
Cheers,
bev

 

[dayzedconfuzed]

high insurance premiums

Thanks for getting back so quick. Bev.

I don't think my foreign tax credit on my unearned income quite covers the taxes that might be due. What happens if I have quite a high insurance premium that I believe comes out quite a bit higher than the standard deduction. Can I switch to using Schedule A for that particular year? and claim the full insurance premiums in the itemised section?

Alternatively from what I can see the taxed owed would be no more than $250-$300. When I send in the forms if I explain why I haven't filed and ask the IRS to take into consideration my utter ignorance of the situation will they be receptive? or are they still going to take a dim view and charge a lot of penalties and interest. I have tried to figure out what they would be but I am not sure if the maximum 25% is per annum or not.

 

[Bevdeforges]

Medical insurance is only deductible (as an itemized deduction) to the extent that it exceeds 7.5% of your AGI. Plus, taking itemized deductions when you're claiming the FEIE means that you have to allocate your itemized deductions between your excluded income and whatever other income you have. That sort of thing gets ugly real fast.

If you only owe $200 or so, then your interest and penalties are based on that $200. Interest rates have been pretty low these last few years, so it may not add all that much to your tax bill. And, if you include a letter explaining that you've only recently found out about the filing requirement, there's a fair chance they might waive the penalties. (Hey, you can always ask and the worst they can say is "no.")

You're far from the first American resident abroad to not know about the filing requirement. And I've heard of plenty of cases where they do waive the penalties for those who come forward and settle up. As long as you don't come off like you're hiding something, it's definitely worth a try.
Cheers,
Bev

 

[dayzedconfuzed]

Thanks again Bev for your quick response.

Sorry to keep being a bother.

As far as itemising, the only items I would put in Schedule A are my medical/dental expenses which after deducting from my income I get a figure a few hundred dollars under my exemption (that is even after taking into account the 7.5% of AGI threshold I need to start from). I don't want to look like I am hiding something but I do have all the paperwork to show my medical expenses.

I appreciate that this is probably getting quite technical now but have I understood you correctly... problems might occur if I were to start deducting non-medical expenses, if I am purely deducting my medical expenses alone are they more likely to be queried?

If I do decide to just file with normal exemptions... do I just send them a money order for the amount of tax I think I owe them with the letter and wait for them to get back to me as to whether I owe them any penalties or interest?

Will they get back to me and say yay or nay as to whether I owe them penalties etc or do I sit and wait for an indefinite period of time.

Thanks again.

 

[Bevdeforges]

Be careful you aren't confusing "exemptions" and "deductions." The standard deduction is just what it says it is - a standard amount you can deduct without having to itemize specific things like medical expenses, deductible taxes, etc. Your personal exemption is a fixed amount you subtract from your AGI just for your personal existence. You also get an exemption for a spouse (if you're filing jointly) and any dependents you can claim.

You always get your personal exemptions. You have to choose between the standard deduction and itemized deductions. And, in the case where you have used the FEIE to exclude your earned income, you have to apportion your itemized deductions between the part of your income that is "earned" and that which is not "earned."

I'm not entirely certain how it works with filing late, but the safest thing is probably to simply send them what you owe and then wait and see if they send you a bill for interest and penalties. It's possible to calculate at least the interest charges on your own (the rates are supposed to be somewhere on the IRS website), but depending on the amounts involved, they sometimes just let it go.
Cheers,
Bev

 

[dayzedconfuzed]

You always get your personal exemptions. You have to choose between the standard deduction and itemized deductions. And, in the case where you have used the FEIE to exclude your earned income, you have to apportion your itemized deductions between the part of your income that is "earned" and that which is not "earned."

Thanks for your quick reply. I am still somewhat confused - I am using FEIE. After excluding the figure I have left is just my "un-earned" income. I understand that I can not have both the standard deduction AND the itemised deductions. If I were to use the itemised route...

I guess my understanding is that I can deduct 100% of my UK bills for medical insurance and dentists bills.

Neither the medical insurance or the dentist bills are particularly work related, so I don't really see how any apportionment would come into play.

Am I interpreting the rules correctly?

Thanks again.