If I qualify for the Foreign Earned Income Exclusion, why do I still owe federal tax?

[TaxGuyBill]

Do you have any other income?
Was ALL of your Foreign Earned Income able to be excluded?
Were you self employed?
Did you have any penalties, such as for withdrawing from a retirement account?

[oshioshi]

My foreign earned income is the ONLY income, and the entire amount was excluded.   I was employed by a foreign company, not self employed.   And I didn't have any penalties, deductions, or any other factors that may have affected a balance owed to the government (at least not that I can gather)

[TaxGuyBill]

Look at your Form 1040.  On page 1, is Line 37 $0?  If not, is there anything besides Lines 7,21,22, and 37?  Is Line 21 the same number as Line 7 (except Line 21 is negative)?

On page 2, what is on Lines 44,45,46, and 47?  Is there anything on Lines 57-62 (if so, which line)?

[oshioshi]

Thanks Bill!  You prompted me to look at my 1040, and I saw that my balance due was for line 61 (healthcare).   I revisited it, and was able to reduce my balance to $0.   But is it correct, that my total income (37) can be 0 even if I earned foreign income?

[ms-laura-mendes]

Dear TaxGuyBill, I'm having nearly the same problem. I'm self employed. What's the deal? Can you help me?

[TaxGuyBill]

If you are Self Employed, you owe Self Employment tax on your business profit.  That is not excluded.

[jordanmsisson]

Bill,

I am also self-employed (UN consultant) and qualify for the foreign earned income on all of my self-employment income for 2017. I understand I am still required to pay the 15.3% self employment tax. I can claim a student loan interest deduction (line 33), but how would this affect adjusted gross income (line 37) if total income is $0 (line 22 - which I assume is calculated by inputing my self-employment income on line 12 as a positive number and entering the same amount, as a negative number, on line 21)?

Should my adjusted gross income still be $0?

I've already filed my taxes but am very certain I mistakenly double-counted my self employment (it is included as a positive number on line 7 and line 12, and a negative number on line 21, so line 22 has the total amount of my self-employment income which is all included under the foreign earned income exclusion).

Sorry if that is confused, but essentially I think I paid the federal tax + self-employment tax when I should have only paid the self employment tax.

[TaxGuyBill · Accepted solution]

Yes, if all of your income is excluded, Line 37 would be $0

However, I suspect that TurboTax is going to give you a error saying you can't e-file with $0 of income.  If that is the case, then add $1 of bank interest.  That will allow it to e-file.

[oshioshi]

You are awesome!  Thanks Bill, you were SO helpful!

[maglib]

If you claim the foreign earned income exclusion, the housing exclusion, or both, you must figure the tax on your nonexcluded income using the tax rates that would have applied had you not claimed the exclusions. See the Instructions for Form 1040 and complete the Foreign Earned Income Worksheet to figure the amount of tax to enter on Form 1040, line 11a.( If you must attach Form 6251 to your return, use the Foreign Earned Income Tax Worksheet provided in the Instructions for Form 6251). So your tax is calculated based on as if all income was earned in the US and you only get a credit up to the lower of the US tax rate or the foreign income tax rate.