Combining FEIE (Foreign Earned Income Exclusion) and FTC (Foreign Tax Credit) for different types of income

[EA17]

Hello!

This is the first time I need to combine the FEIE (Foreign Earned Income Exclusion) and the FTC (Foreign Tax Credit). I live abroad and am able to exclude all of my employment income with the FEIE, but this year I have foreign capital gains for which I would like to use the FTC. Employment income was taxed by the foreign country and capital gains taxes were taxed by the foreign country at this country's flat capital gains tax rate.

How do I enter this correctly in TurboTax to use both the FEIE and FTC (without accidentally revoking the FEIE)? Personal income is entered unter FEIE and the capital gains are entered in the personal section. Since I take the FEIE on earned income, do I only need one Form 1116 for the FTC for passive income? And do I enter my complete foreign income tax burden on the FTC questionnaire for passive income"Foreign Taxes Paid - on other income", or just the capital gains portion? Or do I also have to submit a second Form 1116 for general income, even though all of this income falls under the FEIE?

Thanks for the help!

[pk · Accepted solution]

@EA17 , just to clarify 

(a) you a US person ( citizen/ GreenCard ), have a foreign Tax home,  have Foreign earned Income  exclusion   to avoid double taxation on active income  ( form 2555).

(b) you also have foreign capital gain  that is being taxed by both your host country and by the USA -- hence the need for foreign tax credit --form 1116

( 1)    The disposal of foreign capital assets  are recognized  by filling out various forms -- 4797, 8949,Schedule-D etc. depending on the type  and usage  character of the asset .  There is no difference  in  treatment whether this is domestic or foreign asset.

  (2)   Any foreign taxed paid on  un-excluded foreign  earned  income  is reported on form 1116 under general category  foreign income.  Note that here TurboTax may not automatically show  the un-excluded i foreign earned income  and  definitely not  the allocated foreign tax associated with that un-excluded income.  You have to make sure these are entered correctly ( and keep record of how you arrived  ta that figure including exchange rate used ).

(3)   Additionally , if you have  foreign Passive income ,  ( then under  "Credits & Deductions" tab, you will need to choose foreign tax credit , form 1116  for Passive income  and then enter  Foreign sourced income   ( note that this amount in case of disposal of foreign asset is the amount computed as gain under US laws --generally shown on form 8949 or Schedule-D --- the  gain  under foreign/ host country rules may be different. than that  under US  tax laws), allocated foreign tax paid on this income   ( this may get complicated , especially if the rate of taxation   is  dependent on the type of income  in the host country , but quite doable ).

(4)  Note that while US will recognize  all foreign taxes paid , the actual amount available  ( allowable foreign tax credit )  for the current tax year  is based on a ratio of foreign source income to world income.

Hopefully I have answered all your questions .  Is there more I can do for you ?   Please feel welcome to ask for more help ( if need be ) and one  of us volunteers will definitely help.

If you have questions that are  specific to your case , you are welcome to PM me  (without Personally Identifiable info ).

pk

[EA17]

Hi @pk ,

Thank you for the extremely quick and helpful reply.

(a) Yes

(b) Yes

(2) Since I am able to exclude all of my foreign *earned* income with the FEIE, do I need to submit a form 1116 for general category income at all in this situation?

(3) Following this, it is correct to submit just one form 1116 for passive income listing the foreign capital gains and the foreign tax paid on these capital gains (this portion of the total foreign tax) on this form? And all earned income would be taken care of by the FEIE?

Thanks again!

[pk]

@EA17 , between this and the PM, if I have answered  all question to YOUR satisfaction, please  consider  closing this  by "answer accepted" and  or "cheer" -- that way all of know that you do not need any more on this issue --please   

Of course  if you need more help -- please   give me those and I will do my best to close out  those .

pk