Gross income from foreign source on Form 1116 calculation?

[wzhong99]

I am in an uncommon situation for federal tax return. I worked in a foreign country for an American company for the first 4 months before coming back and working for the same company for another 2 months. Then I got laid off and received severance package and the non-qualified deferred compensation (deferred from 2021 and before). All of the compensations are on my W-2. I have a few questions when I am working on 1a of the Form 1116 in Turbotax Premium to get the foreign tax credits back in my tax return:

1. I am going to allocate the foreign gross income on a time basis. Foreign source income is the amount that results from multiplying the total amount of pay by the fraction of days in which services were performed outside the U.S. Should I use the Gross pay of the 6 months as the total amount, or deduct health insurance and 401k contributions first?

2. Since my employment terminated at the end of June, the severance package and deferred compensation I received from July are not part of the foreign income even though they are from the same company I served. Am I right?

[DaveF1006]

in answer to your first question, you would need to know if the foreign tax paid to that country was on the gross amount or the net amount after the health insurance and 401K contribution was deducted. We wouldn't have that knowledge without knowing the specifics on the income the foreign tax was based from. Normally it is based on net income but can vary.

Yes, your severance package should not appear as foreign income in your return

[wzhong99]

Thank Dave for your reply. The foreign tax was paid based on the net pay without U.S. deductions. The total gross income is pre-tax after benefits and retirement deductions. I am trying to figure out the U.S tax amount on the foreign gross income in Form 1116. To make the number consistent, I would assume the foreign gross income should be leveled to after U.S. deductions as well. Am I right?

[DaveF1006]

According to what you just mentioned, the income was taxed on the net pay that excluded the health insurance as well as the 401K contribution.  This is the income to report because it excluded these deductions. 

@wzhong99