Ask the tax adviser
By George Saenz • Bankrate.com

How to determine foreign income and taxes; and the rules on spousal IRA contributions.

Determining foreign income -- and taxes

Dear Tax Talk:
If a legal resident living in the United States works for a foreign company (as a telecommuter) and pays foreign taxes, does he still have to pay U.S. taxes on his earnings?

Thank you,
Eric

Dear Eric:
As a U.S. resident, you are required to pay tax on your worldwide income and file an annual Form 1040, just like citizens of the U.S. If some of your income is from foreign sources on which foreign income taxes have been paid, you can receive a credit for the foreign taxes paid. Form 1116 is used to claim the foreign tax credit.

However, just because foreign taxes were paid doesn't mean that the income is from foreign sources. In your case, you are providing the services in the United States and therefore the income is sourced in the U.S. Therefore, the foreign taxes being paid are not properly creditable against the income. You should review your situation with your employer and determine why foreign taxes are being withheld on your income since you are not a resident of that foreign country.

Many developed countries have income tax treaties with the United States that should excuse you from paying that country's taxes. The treaty, if there were one, would work to excuse you from the foreign country's taxes, but would not help you with the U.S. taxes since you are working and residing in the U.S. The Internal Revenue Service lists U.S. income tax treaty partners on its Web site.

Spousal IRA deductibility rules

Dear Tax Talk:
I am employed and my wife is not. My income exceeds the point where I can deduct IRA contributions. If my wife contributes $2,000 to a spousal IRA and I contribute $2,000 to mine, is her contribution amount deductible?

Thanks,
Greg

Dear Greg:
A non-working spouse can contribute up to $2,000 to an IRA, provided that the working spouse has compensation equal to or more than the total contributed to both IRA's.

If you are a participant in an employer sponsored retirement plan, then the contributions are not deductible if your combined adjusted gross income (AGI) exceeds a certain amount. You are in an employer-sponsored plan if Box 15 of Form W-2 is checked.

If you are in a retirement plan, then your spouse is also considered to be in the retirement plan for purposes of the IRA deduction. If your AGI exceeds $61,000, before your IRA deduction, then none of your contributions are deductible as you are in a retirement plan at work.

If you are not in a retirement plan at work, then the AGI limit does not apply and both your IRA contributions would be deductible.

If your IRA contributions are not deductible, then you should consider designating the contributions as Roth IRA contributions, if your AGI is below the $160,000 limit for that benefit. From a tax standpoint, a Roth IRA and a nondeductible IRA both have no effect on your current taxes. However, later, Roth IRA contributions and earnings or growth can be withdrawn tax-free. A nondeductible IRA contribution, on the other hand, is recovered tax-free, but any earnings or growth of the account are taxable.

-- Posted Oct. 20, 2000

Bankrate.com writers base their answers on our editorial content and advice of financial professionals. We make no claims or representations about the accuracy, timeliness or completeness of such content, advice or the answers provided to you. Our content, advice and answers are intended only to assist you with your financial decisions. However, by its nature such information is broad in scope. Your financial situation is unique, and our content, advice and answers may not be appropriate for your situation. Accordingly, we recommend that you get different opinions and seek the advice of your accountant and other financial advisers before making any final decisions or implementing any financial or investment strategy.