Ask a CPA: Earning Money Abroad; Owing the IRS

by A CPA

Dear CPA,

I’m a U.S. citizen working for a U.S. company but have since moved abroad. My income is below the limit for the foreign earned income credit so I got my 2014 taxes paid back already. I am still contributing to my Roth 401(k) and Roth IRA which are post-tax investments, however. Am I allowed to continue contributing to these since I don’t owe taxes to the U.S.? If I do will I just have to pay taxes on those contributions when I file my taxes in 2016 or will I be in some other kind of deep trouble?

– Trying to think ahead…

Dear TTTA,

When it comes to paying in “too much” retirement or into the wrong kind of retirement fund, the IRS and investment agencies are generally forgiving; the agencies will send you your money back and a 1099-R for excess contributions (distribution code 8 or P); for too much in a Roth you’ll be taxed on the earnings, for too much (or disallowed) in a regular IRA or SIMPLE plan, you’ll be taxed on the earnings plus however much of a tax deduction you got in that year.

Now, your particular situation requires more digging than an anonymous advice spewing CPA knows, but assuming you’re simply working abroad for a U.S. company affords you the same opportunities to contribute to retirement plans. As long as you are earning enough income to contribute, yes, you should continue contributing to your Roth IRA. Without any tax liabilities, contributing to a traditional IRA would be silly.

Sincerely,

A CPA

Hi,

I have a question/topic for tax month:

For the last several years, I’ve changed jobs or gotten promoted or raises or through some combination of circumstances ended making more money at the end of the year than at the beginning of the year. Every year at tax time I end up owing money because of this (I realize this is a first world problem). I’ve increased my 401(k) contributions to lower my AGI, but I am already saving plenty for retirement. I’m not ready to buy a house, get married, have kids; I don’t have student loans to deduct interest payments on; basically I am doing very little in my life that the U.S. government deems worthy of a deduction.

I am happy to pay my fair share of taxes; I just want to do it regularly throughout the year instead of several hundred extra dollars in March and April. How do I make this happen? Am I doing something wrong with my taxes that this keeps happening? I am not certain that I will continue this trajectory every year, but it’s likely to happen again this year / next tax season.

Thanks!

fletchasketch

Dear fletchasketh,

You are the first person I have ever heard say they have saved plenty for retirement. Congrats!

The further I get myself into the wormhole of individual taxes, the more I see how skewed it is to favor 1) investment and 2) property ownership. There isn’t any way to get around that unless the U.S. government is purged of age 50-something wealthy males for a generation or two; in the meantime, unconventional thinkers like you and I must live within this prison.

For paying your fair share, the withholding allowances are the government’s best guess and many, many people simply accept it and desire to be surprised with a huge tax bill or refund. If you’ve correctly figured out your allowance, line 6 on the W-4 tells your employer to take out a little more per pay period. I’ll make an assumption here that your expected adjusted gross income in 2015 will be $52,000, single, your allowance is 1, and you’re paid biweekly (most common, 26 pay periods a year): $193 withholding per paycheck (look it up here).

Here’s the thing: You don’t have to go through this calculation at all. Here at REGIONAL ACCOUNTING, we just tell the payroll person how much we want taken out per paycheck. And how much is that? It’s how much I owed last year divided by 26. I understand larger companies with byzantine human resources and outside payroll firms may require a W-4, but in my experience most people work with small employers and simply telling the person in charge “take $250 out of my paycheck for federal withholding each pay period” is way easier than working through those tax tables.

I’d much prefer owing the government than giving them an interest free loan, anyway, but that’s a different column.

Sincerely,

A CPA

This story is part of our Tax Month series.

Have a question for a CPA? Email us!

A CPA works at a Midwest public accounting firm completing individual taxes among other accounting engagements. Previously, he worked in radio promotions and routinely judged pudding wrestling matches at suburban bars. Any tax advice contained in this communication is not intended as a thorough, in depth analysis of specific issues, nor a substitute for a formal opinion. Consult your own tax adviser for more info. Or else.

Photo: James Morris

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