Q&A: My mortgage interest is almost the same as my income. Can I claim the interest and reduce the tax deduction?
Q: I am a retired teacher living in England. I own a primary home and a holiday home in England. I am aware that my mortgage interest is deductible on my IRS form I submit from England. The question is: My mortgage interest is just about equal to my U.S. pension. That is the only income that I have from the U.S. My wife and I work over here and live off of that income. Our foreign income is below the 87,500 cut off so it is not taxable in the U.S. Can I claim all of the mortgage interest off of my pension income or must some of it be allocated to my foreign income therefore lowering the deduction from my pension?
A: The Foreign Earned Income Exclusion reduces your total income first. Then, if you still have income you then subtract any adjustments. Then, you subtract out the Itemized Deductions. So, you can claim all of your mortgage interest on your Itemized Deductions, but you will only get the benefit if your Adjusted Gross Income (AGI) is positive.
There is a substantive issue for you and that is that pensions do not qualify for the Foreign Earned Income Exclusion. Only Earned Income is eligible. Please check out this link to an IRS page that explains further: http://www.irs.gov/businesses/small/international/article/0,,id=96811,00.html
My interpretation of the facts presented is that you are not eligible for the Foreign Earned Income Exclusion. You must report your pension on your US tax return and you should report your mortgage interest on your tax return. Based on what you have said, you should not have any tax liability because your mortgage interest is almost equal to your pension. Add in your two Personal Exemptions and you should have a Taxable Income of zero or less.
You do need to file however. And, if you have been claiming the Foreign Earned Income Exclusion in the past you may have to amend your returns and file correctly.
A: The Foreign Earned Income Exclusion reduces your total income first. Then, if you still have income you then subtract any adjustments. Then, you subtract out the Itemized Deductions. So, you can claim all of your mortgage interest on your Itemized Deductions, but you will only get the benefit if your Adjusted Gross Income (AGI) is positive.