Foreign Income earned by spouse not being deducted

[colorlust]

Hi,

My spouse moved here from the UK end of last year. We have earned their income In Foreign Earned Income under Wages in TurboTax, and went through the steps to show it is part of a tax treaty. However the number is not being deducted from the joint taxable income now as we thought it would as this income was already paid tax on in the UK before moving here, as so we are needing to pay a lot more than were expecting to due to this income. Is there something we need to to get this wholly deducted properly?

We have also tried adding the foreign tax paid in Deductions under Foreign Tax Paid, and this did not update our totals either. Is something not working right here? Should this income not be excluded?

Thanks in advance.

[DaveF1006]

Yes, if you have tried to receive a foreign tax credit and if your refund/tax due didn't change, you may not been able to take advantage of the credit this year but there may be a foreign tax credit carry forward to the next year.  A foreign tax credit is a non-refundable credit that helps reduce your tax liability to zero. If the foreign taxes exceed the tax liability for the year, the excess will carry forward for ten years, unless used up before then.

Also something to consider is that you can either take the deduction or a credit. You have a choice when you began working in that section of the foreign tax paid. Taken as a deduction, foreign income taxes reduce your U.S. taxable income. Deduct foreign taxes on Schedule A (Form 1040), Itemized Deductions

Taken as a credit, foreign income taxes reduce your U.S. tax liability. In most cases, it is to your advantage to take foreign income taxes as a tax credit.

You may choose to take the Foreign income Exclusion if your spouse was a US Citizen or Resident Alien in 2021, and meets the Physical Presence Test requirements.

1. federal>income and expenses
2. Less Common income>Foreign Earned Income and Exclusion.

[colorlust]

Thanks for the reply. I read the IRS publication as my spouse should fully qualify as their income was all in the UK and taxed and did not reach the just over $100K cap on it being taxed. We tried it both ways as the Bone fide resident and physical presence test as they qualify for both, but it only deducts the total by $12~K taxable income for some reason.

The deductibles section is not currently able to handle Tax Credit instead of deductible income right now but that did not change the total taxable amount at all so I don't have high hopes for the tax credit instead.

Thanks.

[ErnieS0]

Enter your wife's income separately as a negative subtraction. You'll also need to prepare Form 8833 using IRS fill-in forms and attach this to your return and mail everything.

See Tax Expert @DMarkM1's instructions on how to enter the subtraction in TurboTax.

For more info, refer to Exemption on Your Return.

[colorlust]

Ok thanks, with this method should I income the foreign earned income and taxes anywhere else or just stick to the miscellaneous section to cancel it all out?

[DaveF1006]

Yes, just stick to reporting the income and subtractions suggested previously in the miscellaneous section. 

@colorlust