topic Foreign Earned Income Qualifies for Exclusion but Still Increases Taxes in Deductions & credits

Foreign Earned Income Qualifies for Exclusion but Still Increases Taxes

TylerMarshall — Mon, 30 Jan 2023 19:52:45 GMT

My spouse earned income of $22,715 from a Canadian employer; he meets the physical presence test in Canada and Turbo Tax reports that the income qualifies for being excluded after I complete the Foreign Earned Income Exclusion interview. Form 1040 shows it being excluded on line 8 (Other income from Schedule 1), line 10, however, with it entered into Turbo Tax, and no other changes made elsewhere in the return, Turbo Tax reports on line 16 of the 1040 (Tax), increased taxes of $2,289.

I've gone through the interview many times now and keep getting the same result. Do I need to enter data somewhere else in Turbo Tax?

Whatever clarity anyone can provide would be much appreciated.

Re: Foreign Earned Income Qualifies for Exclusion but Still Increases Taxes

DaveF1006 — Mon, 30 Jan 2023 20:10:01 GMT

It depends. To clarify, does he live in the US or Canada while working for the Canadian employer?

Re: Foreign Earned Income Qualifies for Exclusion but Still Increases Taxes

TylerMarshall — Tue, 31 Jan 2023 01:04:59 GMT

He was in Canada all of 2022 and working for a Canadian employer. In case it matters, I was in the US about seven months, working for a US employer, and was in Canada, not working, the rest of the year.

Re: Foreign Earned Income Qualifies for Exclusion but Still Increases Taxes

TylerMarshall — Tue, 31 Jan 2023 01:05:32 GMT

Re: Foreign Earned Income Qualifies for Exclusion but Still Increases Taxes

RalphH1 — Tue, 31 Jan 2023 19:57:17 GMT

It appears that you’re saying that you’re checking your tax on line 16 of the 1040, then entering the Canadian info and confirming that $22,715 is being correctly subtracted on line 8 of the 1040 (coming from line 8d of Schedule 1). Then at that point, after having done nothing else, line 16 shows $2,289 more tax. Am I correct with this so far?

Assuming you didn’t double-enter the income itself (in which case you’d see the $22k on some other line of the 1040 besides just 1h and 1z), I’m concerned this may be an example of the annoying “stacking rules” part of the foreign exclusion (discussed here), costing you some money. Although the foreign income itself is indeed excluded from taxation, the rest of your income is taxed as if it were included, so you end up with the same amount of taxable income, but possibly with some or all of it in a higher bracket.

This could be the case with a lower total income amount (where the standard or itemized deduction would normally render much of it non-taxable, but the excluded foreign income pushes it up into the 10% bracket), or a higher income amount (where some 12% income ends up being taxed at 22%, 24% income at 32%, etc.).

When you’re able to print out your whole tax return, you should see a “Foreign Earned Income Tax Worksheet,” where you can see this playing out (if you want to do the math). But you can also just locate your 1040 line 15 income amount in the IRS Tax Tables, and if you’re mysteriously paying significantly more than the result, then we have our answer (which can’t be fixed, unfortunately, as it’s just the Internal Revenue Code in action…).

TylerMarshall, hopefully you found a double-entry of the $22k (see my second paragraph) that can be fixed, but if you didn’t and it’s the stacking thing, I hope I at least helped with some clarity!

Re: Foreign Earned Income Qualifies for Exclusion but Still Increases Taxes

TylerMarshall — Wed, 01 Feb 2023 02:47:57 GMT

Thanks Ralph. You've been a great help. I have determined it is the stacking issue unfortunately. I wish Turbo Tax would improve this area of the program; guidance is scant and this issue is never mentioned. I am really glad I found the forum.