How to fill out Reduction in Foreign Taxes in Form 1116? What is the difference between FEI Excluded Less Related Deductions and Total FEI less related deductions?

[rogge1722]

Bring up the f1116 Comp. Wks. to the screen. Scroll down to Part 3- Foreign Tax Computation. Put the pointer over cell 12a1. Right click. On the box that comes up, click on the bottom cell which states "About excluded  FEI-Dedns."  Another box will appear with  detailed info for each cell related to reduction in foreign taxes.

[TSR-1407]

Thanks but this is not working. I saw that you advised other users with the same solution last year. But none of them reported any success. 

There is no box after right click, and the only way to bring up the form 1116 worksheet is to wait for the Review to find the error, saying line 12a1 must be entered.

I don't know what number is Turbotax looking for, since all gross income and expenses have already been entered.

[KarenJ2]

You cannot take a foreign tax credit on income that you have excluded by the foreign earned income exclusion as that would be double dipping.  So you only need to complete this if you are using the foreign earned income exclusion.

So you must allocate some of your foreign tax credit to the foreign earned income and that amount will be disallowed.

For example, if your total foreign exclusion and foreign housing exclusion is $90,000 and your total foreign income is $200,00, the amount of foreign tax credit that you will not be able to use on your return is $90,000/$200,00.= 0.45.

If your foreign taxes were $50,000 , the Form 1116 will calculate that the reduction for foreign taxes is $50,000 * 0.45= $22,500.  So the amount of foreign tax credit you can use is 

$50,000-$22,500=$27,500.  

This is calculated on lines 9-14 on Form 1116.

[cdavid1018]

Hello! I am currently filling out Form 1116 using Turbotax. I have excluded income through Foreign Income Exclusion and now would like to take a tax credit for the taxes paid on the remaining amount. I am confused about how to enter this in Turbotax. 

I am asked for the "Foreign taxes paid on other income" - is this the total tax on all income or the tax on just the non-excluded amount?

Later, I am asked in the Reductions sectino for:  Foreign Income Excluded and then Total Foreign Income. Does this mean I should put the total tax on all income for "Foreign taxes paid on other income" because the calculation will be done for me in the reductions section? Thanks for your help!

[KarenJ2]

You should enter the entire foreign tax amount.in the Other Income box.  Form 1116 will calculate the reduction in foreign tax related to the foreign earned income exclusion.

[Faustus]

This instruction in this TurboTax page is especially infuriating:

Make sure you thoroughly understand how to determine exclusions, deductions, and any income reductions before you make any entries here.

Isn't this precisely what we're paying for? Moreover all of these values have been calculated already from previous data entry. Incredibly frustrating after spending hours getting to this point.

[Faustus]

Just circling back to add that after hours of reading to "make sure [I] thoroughly understand how to determine exclusions, deductions, and any income reductions", I can confidently say that there is no reason for TurboTax to be punting on this.

Additionally, there is a very pernicious bug which prevents the Foreign Tax Credit from being applied correctly. If one has foreign dividends income reported, and a form 1116 for reporting foreign tax has been generated for that first, before the foreign income tax in this phase, TT will not include the income tax paid in the calculation of the FTC. The 1116 form for the income tax has to be first in the list for TT to recognize it.

I've written up the solution to this (at least one that worked for me), here: 
Foreign Tax Credit (FTC) calculation is not including my foreign income tax 

(I wouldn't be so sour about this if I hadn't called Turbo Tax support, had them inspect the page, and offer no meaningful help. Of course I had to give them 10/10 on the survey because I'm not going to punish the poor subcontractor phone agent who took my call for the a bug in the software.)

I hope this helps somebody.

[Foreigner]

What you are suggesting to do does not work. TurboTax does not have that logic built in. I had to reduce the amount of foreign tax paid fir the “double dipping”. The cells 12a1 and 12 a2 do not drive any formulas and the tax refund/due. 

[PR111]

Thank you very much!  This was really confusing and I don't understand why Turbotax doesn't explain what you just did with pop ups and give definitions of what is being asked for.  Also it seems these are data fields you've already entered or Turbotax has calculated for you so why doesn't it just filll in these fields.

[Mike9241]

Turbotax is not professional software. if is merely designed to handle the most common situations. many taxpayers that would be subject to the limitation use pros. even some pro software is limited in what can be handled.  the more sophisticated the programming the more it costs to write the code and that cost is passed on to users. 

[Faustus]

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@Mike9241 wrote:

Turbotax is not professional software. if is merely designed to handle the most common situations. many taxpayers that would be subject to the limitation use pros. even some pro software is limited in what can be handled.  the more sophisticated the programming the more it costs to write the code and that cost is passed on to users. 

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Sorry, but this just doesn't hold water. TurboTax could simply say "foreign income not supported", but it does not. Using the FEIE and/or FTC is the most common situation when one has foreign income. If they are going to sell a product that claims to support returns reporting foreign income, then it cannot be a partial, buggy implementation. One could argue that it needn't provide the same standard of service as it does for domestic income, but it must at least function correctly. In 2020 it did not.

TT certainly could afford to make it work correctly:

Intuit brought in $7.7 billion, up from $6.8 billion in FY 2019, the growth mainly fueled by TurboTax Online and TurboTax products.

$7.7 billion! With a B! I promise you they could fix all of this for 1/10th of what just one of their executives got paid in 2020 alone.

Instead, TurboTax's handling of foreign income puts unnecessary burden on the user by not bothering to do basic calculations, fails to direct the user to relevant information, and, worst of all, what it does do is buggy.

Here are the bugs I suffered preparing my 2019 return:

1. Incorrect summation of foreign income (see above.) 
2. Incorrect entry on 2555 line 19, failing to follow instructions that are printed on the form, "Don’t include income from line 14, column (d)"
3. Failed to identify the FTC as clearly much more advantageous than FEIE+FTC.
   Refund with former, additional tax owed with latter. It's a simple calculation, there's zero reason not to run it and provide the user with the information.
4. Claimed the FEIE using the (subjective, non-deterministic) bona fide residence test instead of the (objective, deterministic) physical presence test, when the latter was much stronger.
   No option to use the latter was given. There were no questions in the workflow to assess qualification. No guidance to relevant information was given. Probably because there is almost nothing about it on their site. And what is there is incomplete and inaccurate.

[IU13]

Faustus is spot-on the issues.

Its incredibly frustrating to do Form 1116 in Turbotax. Im likely going to just use my old CPA again for next year..

I know that I need to take a credit for my foreign taxes but how the hell do i arrive at the correct outcome if the screens aren’t clear.

[zzc83]

"Failed to identify the FTC as clearly much more advantageous than FEIE+FTC. Refund with former, additional tax owed with latter. "

Great points! TurboTax should improve its product to better serve the filers with foreign income.

[PR111]

I agree!  Intuit needs to revisit how horrible the foreign income related sections are.