Bug: Foreign Earned Income cannot be separated into multiple countries on Form 1116

[user17645583867]

Bug: If a taxpayer claims both the Foreign Earned Income Exclusion (FEIE) and/or Foreign Housing Exclusion (FHE) and Foreign Tax Credit (FTC), TurboTax does not allow sourcing Foreign Earned Income (reported on Form 2555) to two or more countries on Form 1116 Part 1.

TurboTax hard-codes 1116 Line 3d = [1116 Line 1a (before rate differential adjustment)] + [2555 Line 45], if a 2555 copy is selected in the "Income Excluded on Form 2555 Smart Worksheet".

If TurboTax's "Income Excluded on Form 2555 Smart Worksheet" is assigned to two or more countries, then:
(1) the entire unexcluded current-year FEI is duplicated in each country on 1116 Line 1a; and
(2) the entire excluded FEI is duplicated in each country on 1116 Line 3d.

If TurboTax's "Income Excluded on Form 2555 Smart Worksheet" is not used, then the correct FEI can be entered manually per country on 1116 Line 1a (via the "1116 Comp Wks"). However, because 1116 Line 3d is automatically calculated (See formula above), there is no way to add back the excluded FEI (2555 Line 45). This results in the incorrect apportioning of deductions between different countries.

TurboTax's decision to compute 1116 Line 3d by "adding back" excluded FEI is a very poor architectural choice to arrive at pre-exclusion gross foreign source income. This is a poor choice specifically because the FEIE and FHE may need to be attributed differently to multiple countries based on ratios of FEI from employment versus self-employment.

Anyone (for instance, a digital nomad), performing services in two or more countries with the income level and choice to claim both the FEIE and FTC, is currently forced to use manual overrides that prevent e-filing.

[AmyC]

Yes, the program knows the 2555 is off limits since it can't be used to claim the foreign tax credit. The rules are:

•  legal liability to the US on the income (income that is excluded from US tax is not allowed in the calculation)
•  tax was paid in 2025
• actual income tax
• If all true, then you are allowed to claim the foreign tax credit. If the income credit is over $300/$600MFJ, then Form 1116 must be filled in.
• In addition, the credit is limited to the lesser of actual foreign tax paid or the US tax liability on the foreign income.

You do get to choose within limits, how you want the income and taxes listed. The goal is to get the correct credit on your return- even if it prevents filing. I hate to ask you to review your entries - maybe one more time since E-filing is preferred: but, the IRS does take paper.

[user17645583867]

Dear @AmyC, Please reread my post. One can claim both the FEIE and FTC when FEI exceeds the maximum FEIE. The bug I describe occurs when that FEI is sourced to two countries.

[AmyC]

All right, let's try again. 

Yes, the non-excluded part of FEI is eligible so let's look at the 1116. I have gone through and entered foreign income in excess of the allowed amount on form 2555. I have entered 3 countries on Form 1116. My 1116 shows the income from each country and tax paid. Of course line 3e shows the total of all income in my return. The credit is based on your ratio to worldwide income. 

I understand that you have 2 countries coming from the 2555 and that is causing your problem.  I tried not linking the worksheet and that seemed to help in my case. I suggest you not allow the link from the 2555 to the 1116. While I managed 3 countries on one 1116, that does fight with the math. 

Follow these steps:

1. Make 2 form 1116s, one for each country to avoid the math fight. I ended up adding another 1116 as branch income, let it start the work, then went to forms and changed it to General Activity. The program held the 2 copies of 1116 using one activity. You have to start the second copy as something besides general activity for it to hold. 
2. Line 1a, enter the unexcluded income for country 1
3. Line 3d - manually enter the portion attributable to country A of gross foreign source income- per 1116 instructions.
4. Line 12 - the disallowed tax will need to be calculated. It is the foreign tax times the excluded income divided by total foreign income.

Remember, the goal is to get the correct tax value and allow you to e-file. If the IRS asks, you have all the proof. for the correct calculations. Everything is best done on the 1116 comp wks. Actually, the more you can do on the worksheet the better. The worksheet does not go to the IRS while the 1116 does. An override on a worksheet does not have the same weight as on a form.

Finally, if everything fails. you can report all the income as various and do one form with all the math. Just be sure that the total foreign tax paid and total net foreign income are correct. The IRS knows these amounts usually.

Of course, you can delay filing to see if further changes are implemented. 

[Edit line 3d 1/29/2026; 8:17 am PST]

[user17645583867]

Dear @AmyC, Your line of troubleshooting is correct, except where you state that "Line 3d - manually enter the portion attributable to country A of gross foreign source income- after FEIE/FHE."

Deductions not definitely related to US or foreign source income must be apportioned with the ratio of FSI to WWI before FEIE&FHE amounts are excluded, as clearly stated in the Form 1116 Instructions:

"Line 3d. Enter your gross foreign source income from the category you checked above Part I of this Form 1116. Include any foreign earned income you have excluded on Form 2555 but don’t include any other exempt income" (Form 1116 Instructions, p. 17).

Lumping all countries with FEI into a single "VARIOUS" country on Form 1116 is a solution and would likely pass e-filing, but that's a highly debatable practice.