Here is a copy of TT's guidance for the "reduction in foreign taxes block."
Lines 12a1 through 12a5:
If you excluded some or all of your foreign income on Form 2555, Foreign Earned Income Exclusion, the foreign taxes you paid must be reduced by the amount of taxes that relate to the foreign earned income that has been excluded on Form 2555. Lines 12a1 through 12a5 are used to determine the allocation ratio to be used in apportioning the amount of taxes applicable to excluded income.
The program performs the computations on lines 12a3, 12a4, 12a5 only for the General category of foreign income (i.e., if box b is checked at the top of this worksheet). Lines 12a1 and 12a2 must be entered when applicable.
If you excluded foreign income on Form 2555, enter on line 12a1 the amount of foreign earned income excluded (Form 2555, line 45) reduced by any itemized deductions that relate to the foreign income excluded.
Enter your total foreign earned income for the year on line 12a2. This is the total foreign earned income from Form 2555 (both copies), line 26, reduced by deductible expenses allocable to that foreign earned income.
NOTE: If you are subject to the alternative minimum tax, review line 12 on the Form 1116 AMT Worksheet for any applicable entries.
Line 12a6:
Enter the amount of any foreign taxes paid in the current year that related to a prior year's earned income in this category. The program will compute the reduction in taxes based on the prior year exclusion ratio, which is determined by the ratio on line 12a7a to line 12a7b. The reduction in current year taxes attributable to a prior year's excluded earned income will appear on line 12a8.
NOTE: If you are subject to the alternative minimum tax, review line 12 on the Form 1116 AMT Worksheet for any applicable entries.
Line 12a7a:
Enter the amount of net foreign earned income excluded in the year the foreign earned income was earned for which the taxes shown on line 12a6 were paid. The program uses this number as the numerator of the reduction ratio for foreign taxes relating to income earned in a prior year.
Line 12a7b:
Enter the amount of total net foreign income earned in the year for which the taxes shown on line 12a6 were paid. The program uses this number as the denominator of the reduction ratio for foreign taxes relating to income earned in a prior year.
Line 12a7:
The ratio shown here represents the percentage of foreign earned income excluded in the prior year for which the taxes on line 12a6 were paid. This ratio is applied to the line 12a6 taxes to arrive at the total reduction for prior year foreign earned income on line 12a8.
