pk
Level 15
Level 15

Deductions & credits

@xiaoxinwu , I am not fully sure that I am understanding the situation  that you are alluding to .   So I will first  mention my understanding and then go from there

(a)  YOU and US citizen/Resident ( Green Card)  are  living and working/earning abroad

(b) You have  some  US income

(c) You have foreign tax credit from prior years that may be available  for 2020

 

Let us  use a fictional  figure for your foreign earnings --- US$ 150,000.  You also have  US sourced income of $20,000.  Your total world income is  thus US$170,000.  Your host country taxes you on  US$150,000, while US taxes you on your world income of US$170,000.  You also have foreign  tax credit available  of US$10,000

 

(1) Because you have been abroad long enough to satisfy physical presence test, you choose  to exclude  2020 max limit of  US$107,600, thus reducing your  US tax base to  US$ 62,400.  Note that this means  you still have  foreign earnings of  US$42,400 and foreign tax  thereon ( allocated).    Assuming further that the foreign country  taxed you  US$45,000.  Thus your total  foreign tax credit available for the  use is $10,000 + $18720  (  the allocated  foreign tax on  un-excluded foreign  income).  So your form 1116 will  use the  ratio of  foreign income   ( tax thereon ) to world income ( tax thereon ) i.e. ratio of the two tax categories   to  compute the  allowable foreign tax credit for the year.

2. You could  also choose  tax deduction  ( although these  days it is often not a good deal  because of SALT limitations ).

3. You could also choose not to use foreign  earnings exclusion and claim the  whole foreign income for purposes of  getting foreign tax credit ---- although  this choice  once made  kinds of sticks with you.

 

Does this make sense  or did I mis-understand your situation ?