I would back out the amount from your W-2 for the foreign source incentive. This would be done on line 21 of the 1040.
Once you calculate the correct foreign earned income (allocate by workdays over the period of time the incentive relates to), then subtract it from the W-2 box one. So line 7, page one of the 1040, would reflect only the US portion of your W-2. Line 21, Miscellaneous income would be a negative number (the foreign source amount subtracted from the W-2).
Then enter the amount of foreign source income as foreign source income subject to foreign tax credits.
To enter the foreign source income as miscellaneous income:
- Click Federal Taxes -> Wages & Income and scroll down to Less Common Income
- Go to the last selection, Miscellaneous Income and click Start
- Go to the last option, Other reportable income and click Start
- When it asks, "Any other reportable income?" say yes and then type in a description and the amount to report it on your tax return.
- Remember to make this a negative number
