You have the option to take the credit or the exclusion. If you decide to take the exclusion, Form 1116 is not reported in your return so it is not necessary to keep it unless you change your mind.
If your income is excluded, then all taxable income reported will be your husband's income with a standard deduction for MFJ as you mention.
Without looking at your return, it is difficult for me to ascertain which would be better. You might try working both scenarios in your return to see which one is optimal. Based on the information you have given me, let's analyze.
- Say if your taxable income is $27,000 and your husband's is $40,000, your total income for the year is $67,000. Here is how the credit is determined. The foreign tax is $4191, foreign income is $27,000, and total income is $67,000.
- The formula is ($4191)(27,000/67000)= $1688. Here you may claim $1688 as a credit and the remainder of $2503 is carried over to the next year to offset future foreign income. The carryover is extended for ten years until used. If there is no future foreign income. Then it remains until it expires after the 10th year.
- The foreign tax credit is non-refundable. If you don't have $1688 in tax liability, the credit may be limited even more.
Now if you take the exclusion and using your husband's income, then your taxable income is $40,000-29,200=$10,800. The tax liability would be $1080 since the tax rate is 10%. This tax liability would be further lessened by withholding and other credits that may apply.
If you take the tax credit, then your taxable income is $67,000-29,200=$37,800. The tax rate is 12% and the tax is $4516. Here $1688 is applied and your tax liability becomes $4516-1688=$2828. Based on these two comparisons, the foreign income exclusion may be more beneficial.
If you are asking if you can claim the full amount of this year's credit next year, the answer is no. If you opt to take the Foreign Income Exclusion this year, you can't reclaim the credit in later years.
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