Gross income vs net income FTC

[astral101]

Hi. I am wondering if under the "Foreign income and exclusion section" (to report foreign income) one should enter the gross foreign income, or the net income, or the gross minus the standard deduction that is also applied in the U.S.?

Issue: Let's assume that my gross income in Canada was 40K. However, I don't actually get the 40K. There are many expenses, taxes (federal income tax, provincial income tax, health tax, unemployment, social security, etc, etc.) which at the end of the day may actually leave in my hand roughly 30K. It would seem somewhat absurd that the U.S. would want to tax me on money that is not actually real net income. Suppose you live in a country where the taxation rate is 50% and you earned 30K. It would seem illogical that you would get taxed on 30K when you only have in your hand 15K.

Doing some research on the IRS site, it says that one can claim the foreign credit AND the standard deduction; but does this mean that I can apply/subtract the standard deduction to my foreign gross income and then just report the "net" income. For a married couple filing jointly in 2023 the standard deduction is 27,700. So do I need to actually subtract 27,700 from 40K and then report the 13,300 net income only?

This is straight from the IRS website (see point 2):

It is generally better to take a credit for qualified foreign taxes than to deduct them as an itemized deduction. This is because:

1. A credit reduces your actual U.S. income tax on a dollar-for-dollar basis, while a deduction reduces only your income subject to tax,
2. You can choose to take the foreign tax credit even if you do not itemize your deductions. You then are allowed the standard deduction in addition to the credit, and
3. If you choose to take the foreign tax credit, and the taxes paid or accrued exceed the credit limit for the tax year, you may be able to carry over or carry back the excess to another tax year.

https://www.irs.gov/individuals/international-taxpayers/foreign-tax-credit-choosing-to-take-credit-o....

[tagteam]

I'll page @pk. Please check back later.

[pk]

@tagteam , @astral101 , I think I have answered  this question earlier.  This is a case where the taxpayer's tax home is USA and  earns  "wages"  from Canadian entity as a remote worker.  This puts the  taxpayer in  messy situation because  the "tax-home" being US, and therefore   taxpayer is not eligible  for FEIE.  Taxpayer  must report the gross  income on Schedule-C and the net income  ( this is the income that is being taxed by both Canada and USA ) is then eligible for  foreign tax credit/ deduction.

Additionally tax payer is subject to SECA taxes, absent a SSA approved "certificate of  participation" from Canadian employer/SSA Equivalent.

Or is this a different issue and I am missing the point ?

pk