@pk, as I mentioned, all of the foreign earned income qualifies for exclusion. I have been 100% abroad (Iceland) since 2019 and am still abroad. The foreign income is below the exclusion limit, so all of it can be excluded. Other income items are capital gains, interest, and K-1 business income (all US-source income). The K-1 business income is taxed in the US. The capital gains and interest income are taxed in Iceland (under the US-Iceland tax treaty, capital gains and interest income are re-sourced to Iceland, and Iceland has the first right to tax it). Therefore, I take foreign tax credit on the US return for the tax paid to Iceland on capital gains and interest income. For the wage income earned in Iceland, I use the foreign earned income exclusion.
All the mechanics of the calculations are going through correctly as I checked in the forms mode. The foreign earned income, if all of it is excludable, does not (and should not) change the AGI and taxable income. If AGI and taxable income do not change with the FEIE, then why does the tax liability double?
