I have income of 159000, excluded 108000 as foreign earned income exclusion, remaining 51000 (taxable income), turbo tax is calculating tax at the rate of 22%. Why?

[ravisan12]

Married filing jointly. The entire income is calculated not based on the bracket but flat 22%

[Critter-3]

Sorry ... but the rules for the form 2555 says even though you can exclude some foreign income from taxation  the excluded amount  will  still be used to figure out your taxes and the bracket you are taxed in ... review the form 2555 & the accompaniing worksheet.  

[ravisan12]

Thank you for the response.

I am only excluding the income of my spouse (after exclusion lets say the amount comes to 5000). Does the tax rate apply for the remaining of the excluded income or for whole taxable income reported in the return?

Thanks again

[Critter-3]

Again the taxes are not calculated in a bubble ... the excluded portion is used to determine which tax bracket you fall into ... review the form 2555 and the correlating worksheets carefully.

You can peek at only  the Federal form 1040 and the summary of the state info by going here:

1) lower- Left side of the screen...click to the left side of the "Tax Tools" text selection.
2)  then select "Tools"
3) then select "View Tax Summary" from the pop-up
4) then back to the left-side and "Preview 1040"

Then hit the "Back" on the left side to get back to your tax entries.

To view your entire return using the online editions (including the state) before you file, you will need to pay for your online account.

To pay the TurboTax online account fees by credit card, without completing the 2021 return at this time, click on Tax Tools >>> Tools  and then Print Center.  Then click on Print, save or preview this year's return.  On the next page, to pay by credit card, click Continue.  On the next screen it will ask if you want Audit Defense, if you do not want this option just click on the Continue button.  The next screen will ask for all your credit card information so you can pay for the account.

[ravisan12]

Once again... Thank you. I have printed and reviewed it and could not find the tax rate in any of the worksheets.

Husband - Total income 76000 ( all US income )

Spouse  - Income 113000 (foreign income exclusion is 108500), so remaining 5,500.

Total income - 81,500 

Standard deduction 27000 

Taxable income - 54500 

Now the tax for the whole amount 54500 is calculated at 22 percentage. I thought only for the excluded income 5,500 should be calculated at a higher rate (which is 22 percent)  and remaining should be calculated at the standard tax bracket.
Please clarify.

[rjs · Accepted solution]

When you take the foreign earned income exclusion, your tax is not just calculated on the taxable income amount on Form 1040 line 15. The amount of excluded foreign income affects the tax because your other income, that is not excluded, is taxed at the same rates that would have applied to that income if you did not get the exclusion. The non-excluded income is "stacked" on top of the excluded income for the purpose of calculating the tax. So some of the non-excluded income gets pushed into a higher tax bracket, and is taxed at a higher percentage.

To perform this stacking of income the tax calculation has to be done on the Foreign Earned Income Tax Worksheet. You can look at this worksheet in forms mode in TurboTax if you are using the CD/Download TurboTax software, or on page 35 of the IRS instructions for Form 1040. Basically the calculation is three steps.

1. Calculate what the tax would be if you did not have the exclusion. That is, add the excluded amount to your taxable income and calculate the tax on the total. (Income on worksheet lines 1 - 3, tax on line 4)

2. Calculate what the tax would be on the excluded amount only, if that were your only income. (Worksheet line 5)

3. Subtract the result of step 2 from the result of step 1. (Worksheet line 6)

You don't see the tax rate on the worksheet because it uses the Tax Table or the Tax Computation Worksheet to calculate the tax. Those calculations are done behind the scenes in TurboTax.