Foreign tax credit

[RabbitFamily]

We worked abroad and earned income from foreign employer. In our 2018 tax return, we took foreign earned income exclusion to reduce our adjusted gross income. Now we might need to amend our 2018 tax return and report more income as well as foreign tax paid. We think we will benefit more by taking foreign tax credit. Our question is how we can switch from foreign earned income exclusion to foreign tax credit while we are using Turbo Tax to amend our 2018 tax return?

[ThomasM125 · Accepted solution]

You will have to prepare the amended return using a desktop version of TurboTax. While working in that program, you will have a "Forms" menu option (icon on top left of your screen.) When you click on that option, you will see a list of the forms in your program on the left of the screen, and you will see form 2555, which is the foreign earned income form. 

When you click on that form to display it, you will see an option at the bottom of your screen to delete the form. Once you delete it, you can than go back and enter your foreign tax credit information.

[RabbitFamily]

Hi Thomas, thanks a lot for your advice. Two more quick questions - (1) do I have to purchase a desktop version of 2018 TurboTax now in order to amend this? Asking as I had already paid the online version while I filed the 2018 tax return. (2) If I delete the form 2555, where can I report the foreign earned salaries? Thanks again.

[SusanY1 · Accepted solution]

You still report the foreign salaries in the section of TurboTax for "Foreign Earned Income and Exclusion."  However, this time when TurboTax asks if you would like to try to exclude the income answer No.  

You will then enter the foreign taxes paid in the Deductions & Credits section under Estimates, and Other Taxes Paid Foreign Taxes.

One note of caution:  if you also took the exclusion in 2017 for foreign earned income, removing the exclusion in 2018 will revoke the exclusion, and you will have to wait five years to take it again without permission from the IRS.  If 2018 was the first year that you took the exclusion and you amend the return to remove it, you will not have the same issue.  Permission from the IRS requires a Private Letter Ruling, which has a filing fee of $2,000.

If the tax credit works better for you, this is not a problem, of course. When you pay taxes on your income overseas, the tax credit is often the better way to go, though, and you can choose the option that provides you the better result. 

[shung89]

I wish to use FEIE and the foreign tax credit. 

Are you saying Turbo Tax will only let you use one or the other?

If so, is a work around to record the max of the FEIE and put the balance amount as a 1099 misc so it will calculate the credit correctly? Just trying to think out of the box because I'm trying to the FTC but it wont show up on Turbo tax because it says it doesn't see any foreign tax paid so I dont' know what to do to get this completed. Any thoughts, ideas is appreciated.

@SusanY1 @ThomasM125 

[SusanY1]

You can use both, if you still have income over the exclusion amount.  

When using the workaround as described, you will get to a page that asks you to enter the income on which you are reporting the tax paid. This should be the income you have already entered elsewhere as here it is just for the credit, and will not flow to the income lines on the tax return.  Here, in your case, input the amount of income that exceeds your Foreign Earned Income and Housing Exclusion amount.

The desktop version of the TurboTax software is a little easier to use for more complex situations such as yours because of the ability to switch to "Forms Mode" and see the data as it is entered on the actual tax forms, something the online version cannot do.  

We try to provide solutions that work with the product you are most comfortable using, which is what this workaround is designed for (it is not needed when working in the downloaded product.)  

For your more complex situation, you may want to look at the CD/Download Premier version of TurboTax - just a suggestion.  We will be happy to continue to provide you solutions to use the online product as well!  If you would like to use the downloaded version - you can find it here: TurboTax download products.   

You can transfer the data that you have already entered into the online product to the desktop product by downloading your tax data file from Tax Tools so that you don't lose work you've already done if you opt to go that route.

@shung89