have a question about form 2555

Forum|Forum|5 years ago
April 13, 2021
2 replies
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hi all,

My wife was out of the US, had foreign income, and qualified to use form 2555 exclusion.

I am w2 full-year US resident. Preparing joint return.

But I see in TurboTax/efile calculator that this “excluded” income still taxed.

Per my understanding it’s due to me, having a US w2 income. So it turned from 2555 exclusion to work in a different way.

Instead of taxing on the higher tax bracket (22%) it taxed on the 10% and 12%.

I clearly see in the IRS form 2555 instruction:

https://www.irs.gov/instructions/i2555

Foreign tax credit or deduction.

You can't take a credit or deduction for foreign income taxes paid or accrued on income that is excluded under either of the exclusions. If all of your foreign earned income is excluded, you can't claim a credit or deduction for the foreign taxes paid or accrued on that income.

But if under current conditions my wife’s income taxed even after using form 2555, maybe I can do the credit of foreign taxes using form 1116?

I looked in instruction and publication 54 and don’t see anything about this scenario.

I even don’t see a sample similar to mine when form 2555 working differently, as I see in my case.

Would be great if someone can suggest it. also would be great if someone can explain and point to any official source why it's happened like that.

Also seems like the same case affecting people who are moving from/to the US in the middle of the year, ie they have foreign and US income in the same year.

DaveF1006

Level 15

It depends. the foreign income exclusion in 2020 is $107,600 per qualifying person. if your wife's income exceeded the exclusion amount, she can claim a foreign tax credit for the excess. For an example, if she earned $137,600, she can claim a foreign tax credit based on $30,000 worth of income. ($137,600-107,600) Turbo Tax will make this calculation if this is the case.

You can also work your scenario both ways in Turbo Tax to see which will give you the best return.

First use a a scenario where her foreign income is excluded. Remove it the exclusion
Next report the income(without the exclusion) but claim a foreign tax credit paid to the foreign country.
See which gives the best result.

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mm1232Author

Level 4

no-no. I am talking about a simple case, foreign income around 20k$. She has not exceeded the allowed income limit for sure. I tried both calculations and I see that excluding under form 2555 is the best option. She was half of the tax year in a foreign country and her limit smaller than 107k$. But anyway it's much higher than income itself. My question not related to this.

I see that excluded foreign income is taxed doing simple exercise:

1) I am preparing all incomes, w2, etc except her foreign income and see the return amount;

2) I am adding her foreign income and excluding it under form 2555;

3) now the return amount is smaller.

All these cases you mention about being over the limit 107k$, comparing scenarios 1116/2555 - obvious from form 1116 / form 2555 instructions.
I am talking about detail which I see in the calculation but can't find in the official documentation.
I clearly see on both portals calculators are behaving in the same way and mentioned differences almost the same - around 10% from the foreign income.

DaveF1006

Level 15

It depends. You can still test it both ways by either excluding the income or add the income and take the foreign tax credit to see which will give you the best return.

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DaveF1006

Level 15

It depends. As I understand, your wife is being taxed on foreign income that she hasn't been able to exclude. My question is, why not? Was it for the following reasons? She should be able to exclude her foreign income if she meets the following four requirements.

Must have foreign earned income
Must have a tax home in a foreign country
Meet either the bona fide residence test or physical presence test.
Make a valid election to exclude foreign earned income.

My guess is that the reason why income was not excluded is because she did not meet the requirements of the the bona residence or physical presence test. if this is the case, she should be able to claim a foreign tax credit for the foreign taxes paid to another country. As far as taxation, foreign income is taxed the same as ordinary income.

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mm1232Author

Level 4

no, it's what I am saying again and again. She meets the requirements. Question not about this.

This "excluded income" still taxed after the exclusion, but at a different tax rate. I clearly see that this income present in 1040 form and has no impact on AGI. But it makes an impact on the tax bill.
It adds around 10% when I am adding to return it and "excluding".

As I mentioned - I tried on TurboTax and efile tax calculators, and I see the same behavior with almost the same numbers.