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Foreign Earned Income Double Taxation?

I'm a bit confused about the foreign earned income exclusion cap.  Let's say you're working in Europe and you make $200,000 in a year.  Since you're working in Europe, you pay between 30 and 40% of your gross income as tax, so let's say you pay $60,000 in foreign tax ($200,000 * 30%).  However, since the exclusion only goes up to around $105,000, you would have $95,000 that are not covered, and thus are subject to your US federal tax rate.  Let's say your federal tax rate is 25% on that $95,000 - are you really subject to another $23,750 ($95,000 * 25%) of tax???

That seems like severe double-taxation and a huge penalty for working abroad.  What am I not understanding here?

2 Replies

Foreign Earned Income Double Taxation?

You can use the Foreign Tax Credit for the other $95,000.

You would enter that you paid $28,500 in Foreign Tax on the $95,000 ($95,000 x 30%), and you will get a credit on your US tax return.  It isn't necessarily a direct credit for $28,500 (the calculations are more complex than that), but it will significantly reduce the taxes because of that which avoids the double-taxation.

Foreign Earned Income Double Taxation?

You should calculate your taxes both ways, once with the foreign earned income exclusion and the foreign paid tax credit for the unexcluded income, and once with only using the foreign paid tax credit.
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