Foreign income earned in Iceland - Turbotax is treating it like I didn't earn the foreign income exemption

[msg9864]

Hello all,

As I'm finally eligible for the foreign income exemption, I'm filing my taxes finally.

I established residence in another country on 05/08/2019. I am still in Iceland and have not been in the US more than a period of ~15 days since then. My wife is in the US, so I'm filing jointly. I earned about 60,000 converting the Icelandic Krona to USD, but housing costs about 12k. I earned about 20k in the US up to that point which I did pay taxes on.

Turbotax says all my foreign income would be excluded, however the "federal tax due" amount doesn't change after they say I'm exempt from everything I made here. Iceland is also not listed in the list of countries of residence. If I change this foreign income value to "0", my tax return says the government owes me $49. If I put what I actually made in Iceland (and was taxed heavily on) as 60k, I owe $4200. If I go back through saying I earned 20k, Turbotax still calculates that I owe based on that value, despite being "exempt"

Am I doing something wrong?

Edit: I have electronic documents from my company in Iceland stating how much I made, but it's not a US government form.

[jtax]

Did you mean 05/08/2019? Or did you really mean 2020? (as in 3 days ago)

This kind of problem is very hard to figure out by looking at the "amount due/refund" box. It is much easier to review the actually forms by looking at a PDF. See https://ttlc.intuit.com/community/saving/help/how-do-i-save-my-turbotax-online-return-as-a-pdf/01/26...

To get the foreign earned income exclusion you must pass the residence test. There are two ways. See https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion ... either

https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion-bona-fide-re... 

[legal foreign residence for the WHOLE tax year]

or

https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion-physical-pre...

[330 days in any 12 months that includes at least one day in 2019.]

So if you just moved you won't qualify, until you have 330 days overseas. But if it was May 2019 you should fine. Then be sure you have properly answered the many and involved foreign income exclusion questions. It sounds like you may not have answered the dates correctly. It is strange by perfectly fine for the dates to include 2020 dates (e.g. 12-month period 5/9/19 to 5/8/20.)

You don't need a US government form for the income. You can use the statement you have. You must report your world-wide income (as a US Citizen). You will have to convert to USD. see https://www.irs.gov/individuals/international-taxpayers/yearly-average-currency-exchange-rates

You can also claim the foreign tax credit instead of the foreign earned income exclusion. Because US taxes are much lower than the rest of the world that usually wipes out your US tax liability (on the foreign income)

also of interest might be the US-Iceland tax treaty. https://www.irs.gov/pub/irs-trty/iceland.pdf

[msg9864]

Ah, oops. Yeah I meant 05/08/2019. I've spent more than 330 days in this country, so I qualify for the Physical Presence test.

I will check into this tonight, thanks!

[msg9864]

I printed as a pdf and it still is saying the exact same thing - I now owe 4600 instead of being $45 in the green. If I don't add the foreign income, that should be completely excluded, I stay $45 in the green.

[jtax]

It is very difficult for those of us in this public volunteer forum to know what is going wrong. We don't have access to your return and you haven't said anything that makes your mistake obvious.

In general try not to look at the owe vs. refund box. Instead look at the right line on your 1040 for total tax liability (line 12 or 16). Also look at 1040 Schedule 1 line 8. That foreign-earned income exclusion should be entered on that line as a negative number.

When you look at the PDF with as much info as you can get, is there a Form 2555 in it? If so look at it and figure out why you haven't got the exclusion. 

If not perhaps the only thing to do is to back to the appropriate part of the interview and go through it again. See this for how to get back to it. https://ttlc.intuit.com/community/tax-credits-deductions/discussion/how-to-get-foreign-earned-income...

As I mentioned you could also go for the foreign tax credit on that income. Not as good as excluding the income (your AGI will be higher) but it will likely get ride of the extra $4555 of tax. This describes how to do that: 

https://ttlc.intuit.com/community/entering-importing/help/where-do-i-enter-the-foreign-tax-credit-fo...

but again it is better to get the foreign-earned income exclusion to work.

[AmeliesUncle]

That's not how the Foreign Earned Income Exclusion works.  Just because it is "excluded", does NOT mean it won't affect your income tax.

To keep the explanation simple, the excluded income uses up the lower tax brackets.  That leaves your taxable income in the 'higher' tax brackets.

The actual calculation does this:  (1) The tax is calculated on your TOTAL income, (2) The tax is calculated on ONLY the foreign income, (3) subtract #2 from #1.  The effect is your non-excluded income is in higher tax brackets.  See the actual worksheet here:

https://www.irs.gov/pub/irs-pdf/i1040gi.pdf#page=32

Plus, the excluded income may still be factored in for some credits and deductions, which may lower or eliminate those credits or deductions.

[msg9864]

I'm going to see what happens if we file separately then. Thanks

[jtax]

@AmeliesUncle has probably figured it out. FYI the worksheet is on page 32 of the link he provided.

This is why isn't a good idea to use the refund/pay amounts. They hide the detail. If you look at the PDFs in detail you'll see the exclusion is actually there and then you could proceed to try to figure out why. But with just the refund/owed amount you don't know if the foreign-earned income exclusion is missing or not working or if something else is going on. 

So I would suggest trying your return without the FEIE and instead with the foreign-tax credit. See which way is better. (But giving you the lower amount on 1040 line 16, total tax.)

[jtax]

By all means try separately, but that is almost always worse. I'm not sure will really help you. You still have to report your Iceland income and your wife has to report her US income. But please let us know what doing your taxes that way shows. (And add the 1040 line 16 numbers not the refunds/owed amounts).

I would rather see you try the foreign tax credit instead of the FEIE. (I don't think you can do both on the same income).