We are US citizens. We live overseas and make our income from a business here. We pay taxes here on the income and thus don't pay US taxes on it. Let's say we make $50,000 and all of it is excluded on our US taxes (using form 2555) so that our AGI (line 38 of the 1040) is $0. Then we can't make contributions to a Roth IRA because you have to have taxable income to contribute to a Roth IRA. I read one website where someone recommended this:
As I understand it, you can contribute to a Roth IRA with foreign earned income, but the contribution amount is limited to the amount of TAXABLE income you have earned. Therefore, you would claim a foreign earned income exclusion on the income you made abroad minus the amount you contributed to the IRA. In other words, if you earned $50,000 abroad, claim $44,500 as excluded income under the foreign income exclusion, leaving $5500 taxable by the US. Since this $5500 is under the amount for the standard deduction, you won't be taxed on it either and your contributions should be fine.
Is this correct? Can I only exclude a portion of my foreign income, considering some of it as taxable US income, enough to contribute $ to a Roth IRA, but I wouldn't owe US taxes because it's below the standard deduction? If yes, then what form would I use to report the income that is not excluded? I don't have a W-2 to report it.