When I choose to fill out the Foreign Earned Income Exclusion option for income I made overseas on a 1099-MISC, the amount of tax increases and I do not know why.

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I have provided screenshots but when I do not choose the FEIE option, TT shows that I owe $382. However, as soon as I fill out the section for FEIE, it raises the amount of tax owed to $553 for some reason.

The total income I made on 1099-MISC while overseas was $3,914.42. I was also attending graduate school online so I got a 1098-T ($9,867.15 paid, $8,438.00 scholarship) so not sure if that is affecting the calculation.

I am claiming one dependent (son) and married, filing separately as my wife is a non-resident alien that has to file US tax (she works for a U.S. company)

[DawnC0 · Accepted solution]

The reason that your refund is decreasing is that when you take the FEIE, it removes the income from your earnings which makes you ineligible for the Child Tax Credit.   You need a minimum of $2500 of earned income to claim the credit and if you exclude it, it does not count.  

You are better off taking the Foreign Income Credit as opposed to the FEIE.  Tell TurboTax that you do not want to exclude the income and see if the credit works out better for you than the FEIE.  Here's what you do:

1. Make sure you've entered all your foreign income.
2. From within your return, search for foreign tax credit and select the Jump to link in the search results.
3. Click Continue and follow the instructions.

In most cases, taking the credit works out better than the deduction. We'll help you decide which one's best for you when you go through this section.

If you choose to take the credit (most people do), we'll attach Form 1116, Foreign Tax Credit if your situation requires it.

Is it better for a couple to file MFJ or MFS