Hi, thanks for your response. I agree with everything you have said, and the question that I had originally is from one of the section where I want to exclude my foreign income. It says:
You may have deductions related to your foreign earned income. These deductions must be entered in other areas of TurboTax. The portion of these deductions allocable to foreign earned income should be entered here. For example, you should enter your business expenses in the Business Income Interview, and here you will enter the business expenses which related to your foreign earnings.
Next, it asks me "Did you have deductions related to foreign earned income?" The employer-equivalent portion of self-employment tax paid on self-employed earnings in a foreign country automatically shows up here.
My question is do I enter any other items here including the gross self-employment expenses? The reason why I suspect gross self-employment expenses are entered here is this one example from IRS: https://www.irs.gov/individuals/international-taxpayers/figuring-the-foreign-earned-income-exclusion
Please let me know if my hypothesis is correct? Perhaps I am wrong and nothing gets entered here at all except for the employer-equivalent portion of self-employment tax paid on self-employed earnings in a foreign country. Thanks.
Self-employed individual
In order to compute the foreign earned income exclusion, you must first know the amount of your:
- Foreign earned gross receipts
- Expenses definitely related to the foreign earned gross receipts
- Deduction for ½ self-employment tax
The exclusion amount will be reduced by the pro rata share of your expenses and self-employment tax deduction. This is because you cannot take deductions against amounts excluded from income.
For example, you operated a service business in a foreign country during all of 2023 and your:
- Schedule C Gross Receipts were $150,000
- Schedule C Expenses were $50,000
- Schedule C Net Income was $100,000
- Self-Employment (SE) Tax was $14,130
- Deduction for ½ SE Tax was $7,065
You would compute your exclusion this way:
For tax year 2023, the maximum foreign earned income exclusion amount is the lesser of the foreign income earned or $120,000 per qualifying person. Since you are excluding $120,000 of your $150,000 gross receipts, you will need to multiply that same ratio by the expenses that are directly related to your Schedule C gross receipts, as follows:
- ($120,000 ÷ $150,000) x ($50,000 + $7,065) = $45,652 of expenses allocable to excluded income
This amount, $45,652, is then subtracted from the $120,000 to arrive at $74,348, which is entered on Line 45 of Form 2555, Foreign Earned Income, and is then entered as a negative amount on the appropriate line of Schedule 1 (Form 1040), with the notation "Form 2555."
