FTC and Foreign Earned Income Exclusion calculation for married filed jointly

[Mike414]

I’d like to understand through the below example how FEIE and FTC exactly gets calculated.

Assume both my wife and I live abroad. I earn 200K, my wife is a homemaker without income.

In that foreign country I pay 15% income tax, --> 30K a year. (I also pay social security taxes, but those I believe cannot be claimed under FTC.)

Let’s say the FEIE limit is 108K currently.

First question: does the FEIE limit combine for married filed jointly cases? I.e.

• Would I be exempt of taxes up to 2*108=216K, in other words can I use my wife’s FEIE limit to offset my own income, too, since I file jointly?
• Or FEIE is applied separately, so I could use only 108K for the income I earn, and the FEIE benefit on my wife’s part would be zero, since she didn’t have any income?

If the latter is the case (or I earn more than the combined FEIE limit anyways), and I have 92K excess income above the FEIE limit (as per the above example) how are US taxes calculated exactly?

• Will my US taxes get calculated based on the 92K income, so since I’m filing jointly, I would be mostly in the 10/12% bracket up to 19.99K/81K, and a little bit of 22% bracket from 81K to 92K? (using the married filing jointly brackets here)
• Do my foreign taxes fully qualify for the FTC, i.e. the entire 30K taxes I paid on the full 200K income could be used as a tax credit? Or would the FTC get prorated somehow, since I used FEIE for the first 108K?

[Critter-3]

Limit on Excludable Amount

The maximum foreign earned income exclusion amount is adjusted annually for inflation. For tax year2021, the maximum foreign earned income exclusion is the lesser of the foreign income earned or $108,700 per qualifying person. For tax year2022, the maximum exclusion is $112,000 per person. If two individuals are married, and both work abroad and meet either the bona fide residence test or the physical presence test, each one can choose the foreign earned income exclusion. Together, they can exclude as much as $224,000 for the 2022 tax year.

https://www.irs.gov/individuals/international-taxpayers/figuring-the-foreign-earned-income-exclusion....

• Will my US taxes get calculated based on the 92K income, so since I’m filing jointly, I would be mostly in the 10/12% bracket up to 19.99K/81K, and a little bit of 22% bracket from 81K to 92K? (using the married filing jointly brackets here)   

As much as you would like the excluded income to not affect which tax bracket you fall in  it is not the case.  It will "push you up" the brackets so more will be in the 22% bracket than you would like. 

• Do my foreign taxes fully qualify for the FTC, i.e. the entire 30K taxes I paid on the full 200K income could be used as a tax credit? Or would the FTC get prorated somehow, since I used FEIE for the first 108K?   

If you have income that is not excluded the FTC will be prorated... look at the form 2555 and the tax calculation worksheet for the peticulars. 

[pk]

@Mike414 , having gone through your post and the very correct reply from @Critter-3 , I would  still like to draw attention to two ( perhaps minor ) points:

1. Two spouses  filing joint, both having a tax home abroad and both having foreign earned income  ( wages  and/or self-employment ), can each exclude  up to the max amount allowed for the year.  Each will file one form 2555  and it is max  of the excludable per form --- i.e. each can exclude  a max amount, i.e. no co-mingle  or one using the other's unused portion of FEIE. 

2. The non-excluded  amounts however, on a joint return is treated as joint income --- that is the total world income ( of the two spouses) is added to compute US taxes, then the taxes on excluded portion is subtracted, then tax on un-excluded portion is ratiometrically  ( ratio of foreign income to world income) allowable for the year--- TurboTax computes this for you  { even though I disagree with the way it is done  because it is biased towards the IRS  and not the taxpayer ) .  Hope I have not confused the situation more 

pk

[Mike414]

Thank you both for your quick responses!

@pk: yeah, your first point is not minor unfortunately in my case. If I interpret correctly what you both said, if I earn say 200K, I will be able only to exclude 112K from my income, and since my wife doesn't currently have any income, her 112K exclusion allowance will go unused, even if we file jointly. Do I understand this correctly?

This is a deviation (imo) from how other limits are handled in general for joint filing, e.g. the tax brackets do get doubled for joint filers, but in case of the FEIE, it won't. There's a big difference, as in one case I'll have 92K to pay taxes on, while in the other case (if the exclusion limits could be combined for joined filing), the family's entire 200K income could have been excluded.

[Critter-3]

If I interpret correctly what you both said, if I earn say 200K, I will be able only to exclude 112K from my income, and since my wife doesn't currently have any income, her 112K exclusion allowance will go unused, even if we file jointly. Do I understand this correctly?

Yes ... that is how it works.

This is a deviation (imo) from how other limits are handled in general for joint filing, e.g. the tax brackets do get doubled for joint filers, but in case of the FEIE, it won't. There's a big difference, as in one case I'll have 92K to pay taxes on, while in the other case (if the exclusion limits could be combined for joined filing), the family's entire 200K income could have been excluded  You are trying to make sense of our income tax situation ???  LOL ... congress doesn't do things that make sense.  And you do get the more favorable joint filing tax rates and the exemption ... you don't lose those  AND  you can exclude a good deal of your income even if it is not all of it.  

[Chen1111]

@Critter-3  Wondering if you could help me make sense of this.

My wife lives and works abroad and I just filled the joint tax return on Turbo Tax.

After selecting married filling jointly, the tax refund was 8k+.

After I filled in my wife's foreign income info, the refund dropped to 2.6k.

After we claimed FEIE successfully for the full amount she earned abroad in 2022, the refund increased to 3.2k, but never the 8k+.

Because of the FEIE, the total taxable income before and after I put down her info are the same as this is basically my income. How come the taxes were 5k+ more even though her income has been excluded.

[Critter-3]

Ok ... you have to understand that the foreign income may be excluded  HOWEVER it is used to calculate the tax rate that is used on the return.  Review form 2555 to see how this happens.  

Until you entered her foreign income you may have been in the 10% tax bracket but after you entered it (and before it is excluded) your income may be in say the 22% bracket and that is what is used to calculate the tax.  Also adding more income can reduce or eliminate certain credits, adjustments and/or deductions (even if the income is excluded) and it affects the taxable portion of your SS benefits.    I highly recommend you save a PDF of the return with & without the foreign income to see how it affects the entire return.