Taxed on Foreign income that has been excluded

[darewreckk]

Hi,

I'm filing a tax return that has foreign income, but that income is excluded due to Foreign Exclusion Exception.  However, I notice that the computed tax still facts that amount in.  What I mean is in the Schedule D Tax worksheet it  1) b it ask for 2c in "Foreign Income Tax Wkshft", but throughout the document there is no reference to excluding it.  As a result, it's taxed like normal income which is then put on Form 1040 Line 16.

If I'm understanding this correctly, shouldn't the tax be computed based on your income after deduction.  In this case, the schedule D workflow doesn't really do that?

Am I missing something?

[PattiF]

No, you are mistaken about this. TurboTax is calculating this correctly. The excluded income is added back for purposes of figuring other taxes like capital gains.

Here are the instructions from the Schedule D worksheet

1.

Enter your taxable income from Form 1040, 1040-SR, or 1040-NR, line 15. (However, if you are filing Form 2555 (relating to foreign earned income), enter instead the amount from line 3 of the Foreign Earned Income Tax Worksheet in the instructions for Forms 1040 and 1040-SR, line 16)

[darewreckk]

Thanks for the response.

If the income is excluded, why would it be factored into capital gains?  

Example:

Let's say i made 50k this year + 20k [From Canada]. Let's say the 20k is excluded.

Wouldn't you be taxed on just the 50k.

Right now i'm seeing the tax computed off of 70K?

[PattiF]

Instead, see the instructions for Forms 1040 and 1040-SR, line 16 (or Form 1040-NR, line 16).

1.

Enter your taxable income from Form 1040, 1040-SR, or 1040-NR, line 15. (However, if you are filing Form 2555 (relating to foreign earned income), enter instead the amount from line 3 of the Foreign Earned Income Tax Worksheet in the instructions for Forms 1040 and 1040-SR, line 16)

[darewreckk]

In the turbo tax  Schedule D Tax Worksheets, 1 has three parts ( a, b, c).

a. Enter your taxable income from Form 1040, line 15

b. Enter amount on line 2c of your (and spources's) Foreign Income Tax Wksht

c. Add lines 1a and 1b

So line a, has the taxable income which excludes the foreign income (this seems correct)

line b, doesn't make sense based on the link you posted.  Is turbo tax forms incorrect here? 

[SDun12]

Your overall tax rate, including the tax on your capital gains, is based on your income before the exclusion, not your income after.  Turbotax is correct here - though trying to follow the "this line, that line" can make your eyes cross sometimes! 

It does look like the worksheet in Turbotax is a little different than the one in the instructions (that was posted above) but the end result is the same - your excluded income gets added back. 

[darewreckk]

I did not know tax rate is determine before exclusion?  That caught me a bit off guard.  I tried googling this but couldn't find anything that pointed that out.  Do you know where I can find more details?