TT Premier 2020 includes foreign earned income even though it established that it was exempt based on bona fide residency test. Is this a bug?

[pk]

@istvan  assuming that you are US citizen/Resident ( Green Card) having a tax home in a foreign country, generally Ex-Pats qualify for Physical Presence test since  Bona-Fide  resident  can only be approved by the IRS  prior to use.   Please tell me which country  are you in ?  When did you first arrive at the  foreign country?  Are you working for a local entity?   Please could you answer  my questions to see if this is the issue or  is there something wrong with Turbo  ( I have  windows 2019 TurboTax Home and business on my machine and  will simulate  the scenario once I hear  from you  )

[istvan]

@pk., thanks for your reply. I have a clearer view of the situation by now, the issue is not the exclusion. Both physical and bona fide tests are positive and the exclusion applies. The foreign earned income is tax free, BUT as it turns out the IRS puts the US-earned income in a higher tax bracket as if the foreign earned income was included, and I end up paying more tax on the same amount of US income than the tax table shows. I have seen this practice in the mirror case, in Hungary, too. It seems there might be a better solution, though, but I'll have to work out the actual figures to be sure. I can revoke my exclusion and instead add the foreign earned income, but then, because Hungary and the U.S. have a tax treaty, I can get tax credit for the taxes I paid in Hungary.

[KarenJ2]

Yes, unfortunately a number of years ago, the IRS changed the tax rules, and the foreign earned income is added back to all income before the US tax is calculated.  Then the tax is calculated on the excluded income.  The difference in tax is your US tax.  This is called the stacking rule.

You are married filing jointly, have two children and you take the standard deduction ($24,400) and child tax credit ($4,000 for two children). Total wages $112,000

The US tax on this income is calculated as follows:

US tax on $112,000 is $6,989

US tax on $105,900 (amount excluded) would be $5,647

Net US tax payable
($6,989 - $5,647) = $1,342

Before this change, the tax would have been calculated only on the tax rate that applies to $6,100.

 If you have been claiming the FEIE in previous years using Form 2555 and you decide this year to use only the foreign tax credit you cannot go back to the FEIE for the next six years unless you receive permission from the IRS.