Why doesn't the foreign tax credit (Form 1116) or exclusion (Form 2555) cover my full liability for foreign earned income?

[irritatedExpat]

I'm an expat in the UK, filing jointly with my spouse who lives and works in the US. As a good US citizen, I'm supposed to report my meager UK income--which the UK already taxes quite heavily--and then either take a credit for my paid UK taxes (Form 1116) or exclude this income (Form 2555). For my small UK income, either strategy *should* avoid double-taxation, but strangely neither does in practice (at least using Turbotax) so I am trying to figure out why and if it is an error.

Before I enter my UK income, Turbotax estimates that we owe about $1,500. After entering my UK income as Foreign Earned Income, Turbotax estimates that we now owe about $15,000. If I try excluding the UK income via Form 2555, Turbotax estimates that we owe about $10,000--still much more than the original $1,500, despite my income not approaching the foreign exclusion limit. If instead I try claiming a credit for the foreign tax that I've paid, via Form 1116, Turbotax tells me that we now owe $5,500--still well above the original $1,500, despite my UK income already being taxed at a much higher rate in the UK.

This can't possibly be right, can it?

[pk]

@irritatedExpat , first I need a few details -- (a) when did you arrive in the UK; (b) is your wife working and living in the USA or she is with you and working  remotely; (c) is this the first year you are trying to exclude foreign earned income; (c) your foreign income is from self-employment / sole proprietor business or being employed by a local entity;  ( d)what is you gross income in the UK and that of your spouse in the USA (if she gets a W-2  then the Box 1 amount ); (e) Shew is US citizen/Resident ( Green Card )  ??

Generally,  the amount of excluded amount does not show up on your gross income but it impacts your tax rate i.e. the marginal rate is based  on world income ( including the excluded amount).  Also the  foreign tax credit , while recognizing the amount paid ( converted to US$), the allowable amount for the year is limited essentially by a ratio of foreign income to world income.  Thus , often  when one spouse has large US income and the other spouse has a smaller foreign income, it may be  more tax advantageous to file as  MFS ( Married Filing Separate ) .

Please answer my questions and I will come back and  help out

pk