topic I am abroad and my US income is less than std deduction, and I have enough tax credit for my foreign income. Why does turbox show I still have to pay US tax? in Deductions & credits

I am abroad and my US income is less than std deduction, and I have enough tax credit for my foreign income. Why does turbox show I still have to pay US tax?

xiaoxinwu — Tue, 16 Mar 2021 06:51:43 GMT

I had foreign income and pay tax with a much higher tax rate than US. I had a little US income, definitely less than std deduction. However the turbox tool shows I still have to pay some tax to US, looks to me like a double tax.
EXAMPLE US income: 20k

Re: I am abroad and my US income is less than std deduction, and I have enough tax credit for my ...

DaveF1006 — Tue, 16 Mar 2021 22:25:12 GMT

It depends. Are you taking the foreign income exclusion or the foreign tax credit? If you are claiming the credit, you may end up paying tax to the US, when the incomes are combined because some of your foreign tax paid may have been limited and not fully utilized. This can occur because The IRS limits the foreign tax credit you can claim to the lesser of the amount of foreign taxes paid or the U.S. tax liability on the foreign income.

Re: I am abroad and my US income is less than std deduction, and I have enough tax credit for my foreign income. Why does turbox show I still have to pay US tax?

pk — Wed, 17 Mar 2021 01:32:29 GMT

@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

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 ?

Re: I am abroad and my US income is less than std deduction, and I have enough tax credit for my foreign income. Why does turbox show I still have to pay US tax?

xiaoxinwu — Thu, 18 Mar 2021 06:13:27 GMT

Thanks for the reply. Yes that is the information I need. Can you kindly complete your example by giving how much is the tax needed to pay to IRS? Would standard deduction apply? I guess so, then is it the the product of（world income minus standard deduction) and US tax ratio? Assuming US tax ratio is 20% then the tax needed to pay to IRS is $8280, less that $28720. In that case no tax is owed.

Do I understand correctly?

Thanks.

Re: I am abroad and my US income is less than std deduction, and I have enough tax credit for my foreign income. Why does turbox show I still have to pay US tax?

pk — Sun, 21 Mar 2021 19:12:23 GMT

@xiaoxinwu , very generally your understanding correct in that standard deduction applies, and foreign tax credit is subtracted from the US tax liability and may be zero . However there are nuances to the computation of the US taxes when foreign earned income exclusion applies --- the actual tax actually is computed based on the total world income ( including excluded income ) and then that portion of the tax that was due to excluded income is now subtracted out to get the final US tax liability. The foreign tax credit allowed and any other credits are then subtracted for the final tax position.

However , you do not have to worry over all these complications -- TurboTax generally does a very good job of doing this for you.

Is there more I can do for you ?