Foreign Tax Credit Comp Wks: Excluded FEI - Dedns must be entered.

[KT1974]

I live abroad and have filled out all of the information and upon review I get the following error messages:

Foreign Tax Credit Comp Wks: Excluded FEI - Dedns must be entered.

and

Form 1116 (COPY 1) -- Foreign Tax Credit Comp Wks: Total FEI - Dedns must be entered.

Where do I get those numbers and why isn't TT transferring the required information to this form?

[Mike9241]

Are you filing form 2555 and excluding all your foreign earned income from US taxation? You are not allowed to take claim a FTC on excluded income. 

[KT1974]

Thanks for your response - I can't exclude all of my income, as I earned about $189k. So I've used the FEIE to exclude the first $126k (or whatever the exact amount is), but I still have income left over. As I understand it, I can use the FTC to reduce my tax liability. I am in Brazil and so I pay 25-30% income tax on all of my income.

[SusanY1]

You can combine the foreign earned income exclusion with the tax credit, just be sure to calculate the reduction in foreign taxes and enter this number into the Foreign Tax Credit section of TurboTax. 

That calculation is determined by dividing the exclusion taken by the total foreign sourced income.  Then you multiply the tax paid by that factor, giving you the amount to exclude. 

As an example, if you have $126,500 of total income and housing exclusion, $190.000 of foreign earned income, and $55,000 of tax paid it would look like this:

126500/190000=.665789

55,000*.665789=36,618 so the reduction in foreign tax would be 36,618 leaving $18,382 of foreign tax that is considered for the foreign tax credit.  

Your numbers won't be this, exactly, of course and TurboTax doesn't do that math for you - but there is an area to enter this "reduction in foreign taxes" which is the amount of tax attributed to excluded income.  

[KT1974]

@SusanY1 - Thank you very much! This is so helpful!

Just a couple of clarifying questions...in the area you mentioned, "deduction in foreign taxes", I have to enter a couple of numbers:

2024 Foreign Earned Income Excluded Less Related Deductions

and

Total Foreign Earned Income Less Related Deductions

In the examples, you cited, which numbers would go in each box? Based on your wonderful feedback, I understand how to calculate the foreign tax credit, but am still a little unsure which figure to put where. Thanks again!

[DaveF1006]

There's a direct method to report this using SusanY1 example.

1. As you prepare your Foreign Tax Credit section in your return, when it asks for gross income, record $63,500, which is the difference between $190,000 and $126,500.
2. When it asks for foreign taxes paid, record $18,382.

This should accurately report the Foreign Tax Credit you are entitled to.

[KT1974]

Thanks, but I'm still not following. There is no screen where it asks me to record my "gross income" and no screen where it asks me to record my foreign tax paid. 

Instead, there is a screen called Reduction in Foreign Taxes. Underneath it, it asks for:

2024 Foreign Earned Income Excluded Less Related Deductions

Total Foreign Earned Income Less Related Deductions

Foreign Tax Paid in 2024 For This Category Related to Prior Year

Participation in International Boycott Operations

Other Reduction

I don't know what to enter on these screens. Using the example mentioned, what would I put in these areas?

[SusanY1]

The Foreign Earned Income Excluded Less Related Deductions would be the amount of your FEIE usually. Most taxpayers using the standard deduction don't have "related deductions" here - but those wouldn't be separately identified anywhere in the TurboTax entries if you did, which is why it isn't populated for you. If you are itemizing deductions on your return (Schedule A) for things like mortgage interest and medical expenses - and those items are related to the foreign income that you earned, then you could have related deductions.

Total Foreign Earned Income could be the same number (if you exclude 100% of your income), or it will be the total amount of your foreign wages if you  have a partial exclusion.  

 

[KT1974]

I see!! Got it - that makes perfect sense now.

I was almost going to give up and hire an expert that specializes in foreign tax returns, but this community has been a life-saver!

Muito obrigado! 

[SusanY1]

I am so glad we could help!