Yes, thanks, I did so. I think the bug may actually be with the IRS, not completely TurboTax. According to the IRS instructions for form 1116, you're supposed to fill in the foreign income that is taxed in the source country or country of residence – but, logically, exclude any foreign earned income that you've already reported on form 2555 (because the US won't tax you on that, so there should be no associated foreign tax credit). However later on 1116, you report all the foreign taxes paid, including (though this is not obvious) on the US-excluded foreign earned income. Then later still, you note the US-excluded FEI, so that you can subtract the foreign tax paid on it from your foreign tax credit. Logical, but very roundabout. The big problem occurs in the course of doing this, in the computation worksheet for line 12 (12a(1), 12a(2) etc.). In 12a(1) you're supposed to enter your "current year FEI excluded amount," same as you put on form 2555. But then in line 12a(2), you're instructed to put the "total FEI," combining the excluded and non-excluded (i.e. the total on which you've paid foreign taxes). But there's a mismatch: part of the foreign income on which I (and many people) paid foreign taxes is neither earned nor passive – foreign pension, in my case. So if you dutifully enter only your FEI here, it'll be the same as on the previous line, meaning your foreign tax credit will be reduced by 100%. This cannot be the IRS' intention. I think they erred in the instructions for line 12: line 12a(2) should be total foreign income on which you paid taxes (in this "general" category, i.e. excluding dividends etc.), not only the "earned" component.
The choices seem to be to go against the instruction and enter all this foreign-taxed foreign income, including the unearned, or to revoke one's FEI exclusion (i.e. delete form 2555) and put all the foreign-taxed income and foreign taxes paid on it onto form 1116. Does anyone know the implications of revoking the FEIE – and/or whether the IRS would mind if one takes necessary liberties with the instruction for line 12a(2)?
