I'm using TurboTax online. I reported my wife's foreign earned income as she worked in a different country. Form 2555 had been added to claim foreign earned income exclusion but when I tried to claim foreign tax credit I found that her entire salary was reported on Form 1116 Line 1a, but my understanding had been that as per IRS only wages not excluded on Form 2555 should be reported here.
Was my understanding wrong and she can claim her entire salary in both Form 2555 and Form 1116, or is there any place in TurboTax online where I can reduce the amount in Form 1116 Line 1a?
You are correct that you cannot apply both Form 2555 and 1116 to the same amount of income. You will apply the Form 2555 first and the remaining for Foreign Tax Credit.
After you enter the foreign income exclusion info, you will need to go through the foreign tax credit section to make adjustment how much foreign income and taxes should be used to calculate the correct amount of foreign tax credit. TurboTax does not automatically pro-rate the benefit.
Here are the steps:
Why is my full foreign earned income (wages) not getting excluded in Form 2555?
Please refer to the description of the issue here.
@tbudd as explained above TurboTax does not automatically adjust the amount that is to be entered into form 1116. You need to follow the steps above and manually change the amount that is not excluded by form 2555 in order to get the proper foreign tax credit.