Form 1116 and Form 2555 round and round in circles

[Edgeman]

This is bananas.

I am a US citizen living abroad. I used the ONLINE Turbotax software last year (2021) and did not have a problem filing the tax return. For 2022, I am trying to use downloaded Turbotax Deluxe 2022 software for Windows desktop and don't understand why I am being forced to include a Form 2555 (I did not file this form last year). All of my income is foreign and I paid tax at source in the foreign country.

I do not want to use the Foreign Earned Income Exclusion (FEIE), I simply want to use a foreign tax credit (based on the taxes I already paid).  Based on this objective should the program not calculate the taxpayer's US tax liability via 1040 and then post-completion of 1116, apply any tax credit to reduce that liability? What does 2555 have to do with anything?

Because the program is forcing me to use 2555 (on the assumption I want to use the FEIE, it is doubling my income (1040 income on 1a is being added to Foreign Income on 2555), taxes paid is not doubling and so I have a tax liability even though I should not: (1) I paid full freight income taxes in the UK plus I even have a FTC credit carryover from last year).

There is something messed up in this program. Anyone face this issue? Any resolution? 

[DoninGA]

See this TurboTax support FAQ for entering the Foreign Tax Credit on Form 1116 - https://ttlc.intuit.com/turbotax-support/en-us/help-article/import-export-data-files/enter-foreign-t...

[Edgeman]

Thanks for your reply. Yes, I have seen that page and attempted to follow its instructions. There is no getting around it: the software is flawed and Turbotax needs to fix it.

Step 2 of the page that you sent tells you to "Enter all your foreign income in Wages & Income if you haven't already".

Now, there are two places in the Wages and Income section where this could go: (1) US Wages and Income i.e. Box 1, and (2) Less Common Income: Foreign Earned Income and Exclusion. Given my objective to take the Foreign Tax Credit and not the FEIE, I believe I should be entering the foreign income in Box 1. In fact, I think that's the whole point, as Turbotax' own tutorial will tell you "If you do not include wages earned in another country as part of your U.S. income, you cannot claim a credit for foreign taxes paid on those wages".  The first software problem is that you can't so this in Step-by-Step mode as it won't give you the option to enter income without a W-2, so you have to enter this income in the Forms view. This foreign income is then captured as Wages and Income. So far so good. The income is captured in Box 1.

I  then have to ignore the Less Common Income: Foreign Earned Income section of the Wages and Income module. Why? Because if you go through it, you get to an interview question that states "Enter Your Foreign Earned Wages (this could include wages or payments from a foreign employer or cash". If I enter the same income number in here as I did in Box 1, the software double counts the income. You can see it in the Tax Summary in Forms view (it takes 2x the income and from that deducts the allowed foreign income exclusion, which is meaningless as it should not be counting the income twice). On this basis, as stated, I have to declare zero Foreign Earned Income in the Less Common Income: Foreign Earned Income section.  

Now if I go the Foreign Tax Credit section as the page you sent suggests, and follow the steps, there is no point where it asks for the income you earned in the foreign country (in my case the UK). It does ask you for Other Gross Income (none), Definitely Related Expenses, and Foreign Losses. It then asks for Foreign Taxes Paid (as it should). I have entered this into the software (the taxes were automatically withheld). The taxes were paid and not accrued. I then complete the rest of the interview firstly without entering last year's Foreign Tax Credit Carryover amount and the software is still showing a US Federal tax liability which makes zero sense: (1) my tax rate in UK is higher than in US, (2) there is some benefit from the standard itemized deduction. Something is broken and I can't figure out what it is. If I go to Forms view and look at the Tax Summary, my total credits does not capture any Foreign Taxes Paid at all.

Plus despite having zeroed out the Less Common Income: Foreign Earned Income section of the Wages and Income module, the Forms view is still showing that I have errors in Form 2555. There should not be a Form 2555!!!!!!

[Edgeman]

I forgot to add the Step by Step mode shows zero Foreign Taxes once I was done, even after entering this as per the interview. 

[DoninGA]

@Edgeman 

The IRS Form 1116, Foreign Tax Credit for tax year 2023 has not yet been finalized in TurboTax.  This is what may be causing the problem.

The Form is scheduled to be available and finalized in TurboTax on 01/17/2024 (subject to change)

Go to this TurboTax website for forms availability - https://form-status.app.intuit.com/tax-forms-availability/formsavailability?albRedirect=true&product...

[Edgeman]

Hi. Thanks for your reply again. To be clear, I am filing 2022 (I know it's late but for health reasons I was out for much of last year). I am using the 2022 desktop version of Turbotax.

If I compare the Form 1116 from my 2021 tax return to the one I am trying to complete, it is clear the 2022 software is not picking up items that it should be. 1a (Gross Income from sources within the country shown) shows zero. I can see that it is trying to pull a number from Form 2555 as it says "From Form 2555". As I said in my previous post. I zeroed out that number because if I do not,  it double counts the income. I may also have mentioned before that my 2021 filing (also done with Turbotax but online) has no Form 2555.

Somehow the online version (used in 2021) allowed you to explain that 100% of US Wages and Income was Foreign Sourced Income. You can see this in the adjustment in Section 2 of the Form 1116 i.e. 2f where you divide Gross Foreign Source Income by Gross Income from all sources. In 2021, that number was 1 (or 100%) for me. With this 2022 desktop software, 2d (Gross Foreign Source Income) is not being picked up. There is no place in the interview for Form 1116 where you can enter this. There is no place on the Wages and Income section where you can say wages entered are all Foreign Source Income. The software wants to FORCE you to declare it in the  Less Common Income: Foreign Earned Income and Exclusion section. That would be OK if you can do two things after that: (1) explain that the income you are declaring is the same as that you have declared as US Wages NOT in addition to it, (2) that you do not want to take the FEIE and instead you want the tax credit. It will NOT let you do (1). It will ask you if you want to exclude the Foreign Earned Income, if you say no, it does NOT solve the double counting of income issue.

Because tax is late, there is no option to use the online version! I may have to do this manually and try to get a refund somehow.

As I said, at this rate I will be headed for the looney asylum.....am going crazy here.

[DoninGA]

@Edgeman I am going to page one of our experts who may be able to assist you in resolving this problem related to Foreign Earned Income and the Foreign Tax Credit on your 2022 tax return.

@pk

would you be able to assist here?

[pk]

@Edgeman ,  while i digest your post (s), you said you filed 2021 with on-line version.  Did you use  Foreign Tax Credit then ?  For 2022, did you transfer that file as a starting point ?  Which country are you in ?

 I will come back tomorrow  ( PST ) after simulating your situation on my 2022 TurboTax  Home & Business.   I will probably need more details  to be able to see Turbo is misbehaving.  However my initial though is that once Turbo  thinks you have selected  "Foreign Earned Income & Exclusion" it is primed for no other and therefore  it is refusing to delete/ignore 2555 and the follow on 1116 issues..  If that is the case  the safest way is to delete the whole file and start afresh and enter your foreign earnings  under wages  ( if that is the case, say you do not have a W-2 )

We can talk about this more tomorrow.

pk

[pk]

@Edgeman 

 do you still need help -- I need data to simulate the case and see why Turbo is giving you trouble.

pk

[Edgeman]

Hi Pk,

Many thanks for engaging on this. I appreciate the help from both of you. Let me delete the return and start again. This time I will enter the foreign income in Wages and Salaries and ignore the FEIE module. I will then complete the foreign tax credit module in deductions and see what happens.

Chika

[pk]

@Edgeman , I would request  an update  -- whether it works or not  ( both will be useful ).   Please

pk

[Edgeman]

Hi PK,

I did try and got nowhere. See if you agree with this logic:

The US taxes worldwide income. Assuming you worked the whole year in the US, and earned just wages (salary) and no other income, you should enter this amount in Box 1 of the 1040 (Y/N)?
Now, if you lived overseas and earned all your wages abroad, you should still show the same amount in Box 1 of 1040 but be able to declare on Form 1116 (or somewhere) that the entire amount was earned abroad (Y/N)?
In theory, the software should calculate a Federal Tax Due of some amount on the basis of the US income declared, however the declaration of taxes paid in the foreign country should generate a foreign tax credit in the same year, which can be used to offset the Federal Tax Liability (Y/N)?

For some reason, the program is not doing this.

It generated a Federal Tax Due once I completed the Wages and Income Section (the counter at the top of the program changed from $0 to a positive number. I then completed the Deductions and Credits section, specifically the Foreign Taxes Paid module of Estimates and Other Taxes Paid (in step-by-step view). The counter still showed the same Federal Tax Due.

If you go to Forms view, the Form 1116 shows: (1) Gross Income from the country I worked in is zero (Box 1a of 1116 – remember last time it indicated that it wanted to pull this number from Form 2555, this time it does not reference 2555, but the field is still blank), (2) Gross Foreign Source Income Box 3d is also zero, (3) Gross Income From All Sources Box 3e is also zero. Part III (Figuring the Credit) seems to be working: (1) it shows the correct foreign taxes paid in Line 9, (2) it shows the unused tax credit from last year in Line 10, (3) it adds both to generate a tax credit in line 14 (4x the tax liability).

The screwy piece seems to be Line 20 “Individuals: Enter the total of Form 1040 line 16 and Schedule 2 line 2). That entry is blank. As a result, Line 21 (the maximum amount of the credit is also zero). Finally, Line 24 is also zero…..in other words, there is no tax credit generated.

Long story short, having paid (US dollar equivalent) more than what I would have paid in federal taxes to UK government (deducted out of paycheck), I am still showing a tax liability in the US on a single source of income (wages  

As mentioned, I used the online version last year with no issues. Thoughts?

If you can’t see where I am going wrong, I guess I will try to get a refund because this program is clearly not capable of doing the foreign tax credit piece

[pk]

@Edgeman , I don't know how  exactly the on-line version works ( even though I think it mis substantially the same ).

Based on your reply I created  a  dummy return  with the following specifics:

1. H/W , US persons, filing jointly., with dummy SSNs

2. H/W live i n Germany, H earned  US$130,000,  W- no income, ;

3. Taxes paid to Germany  US$28,300

4. No other income -- i.e. world income = foreign income for simplicity 

4. On entering the foreign income as wages   ( THIS IS AN ERROR, i will discuss below )  as wage income  the US tax showed  as US$13,728

5. Thereafter , I went to  deductions/Credits tab, continue; chose  " I will choose what I work on "; from drop down list selected  "Foreign Tax Credit" UPDATE;   --> 

Did you Pay Foreign Taxes --- yes

Before we begin .......  yes ;

Have  you reported all  ..... foreign  taxes  ---- continue

Deduction or Credit  -----Take a credit 

Tell Us about your Foreign Taxes  ---- Choose "None of These Apply";

Next Two Screens --- continue;

Do you want Deduction  or Credit .....  Take Credit;

....

....

Foreign Tax Credit Worrksheet.... Continue 

;

;

;There is a screen here where it asks for  Foreign Country Name  --- in my case Germany

Choose Type of  Income --- Choose General Category;

Now you will two boxes  --- enter the foreign income  ( same as Wages entered earlier )  and Foreign Tax Paid ;

There will still be a few screens more to close the  whole thing.   

Now the US liability goes to ZERO and  the rest of the foreign taxes  paid  is tagged as carry-over or carry back

.

Open the form 1116 and see it has been  properly filled out.

The error I made  ( on re thinking where to enter the  foreign earned  income )  is to enter  FEI as  wages  --- to make sure that the Schedule-SE ( Self-employment income --- equivalent  to FICA )  gets generated properly, One should   use Schedule-C -- enter the gross income  = total Foreign Income,  No expenses .   This will generated a Schedule -SE  for the SECA taxes.  The  "wAges " now  just appear  on a different line on form 1040.

I found the questions  in the path rather badly worded  / unclear  and had to go around two times to make sure I chose the right things to create the form 1116.

I also found that the easiest way to start all over , is to go to forms mode , open form 1116  and  delete it ---- then I was bale to go back to deductions & Credits  section and start all over .

Let me know if this works for you --

pk

[DaveF1006]

First of all, you should not have form 2555 in your return unless you are trying to exclude foreign income.  When you complete the section asking about your foreign income, there will be a question that asks what foreign income you wish to exclude.  Make sure you place a check in the box that indicates neither you/spouse wishes to exclude your foreign income. Checking this box will prevent the presence of the 2555.

Now it sounds like you are off on a good start in claiming the foreign tax credit. make sure you complete these steps in the step by step mode and not on the forms themselves. When the program asks you to record other gross income-XXX you will place the amount here in addition to placing it in the miscellaneous section above.  This will not double the income. Finish out the entries in this section.

Also if you still have the 2555 in your return,  delete it by going to forms mode>select 2555, then delete it in the right navigational pane in your return.

Let me know if this helps.

@Edgeman 

[Edgeman]

Hi PK,

Apologies for the absence. Thanks for doing the dummy trial that you did. I think you are saying entering the foreign income as Wages is an error. At the bottom you suggest entering income on Schedule C. If I add the Schedule C form into Turbotax it comes up as a form for sole proprietors. You don't mean that do you? Why would we need to utilize that form in order to complete the tax return? The FICA and SECA taxes were not a factor in last year's tax return. I know this because I am looking at last year's tax return and there is no Schedule C. Reminder: last year's tax return was created using Turbotax Online. It spat out 1040 including Schedules 1, 2, and 3, Schedule B, Form 1116 regular and AMT, Form 6251....no Schedule C).

I think there is a fundamental flaw with this software. You should be able to enter a gross income (wages)  number which generates a US tax liability. You should then be able to go to 1116 and enter the same number as Gross Foreign Source Income (the form has a factor that allows you to show Gross Foreign Source Income is same as Gross Income from all Sources.) You should then enter the foreign tax you paid on that income and the software should reduce your US tax liability (or not). This is simply not possible to do with this software. 

There is no link between US income and US taxes and Foreign Income and Foreign Taxes in this desktop version. There simply isn't. It either counts it twice or not at all.