Foreign Earned Income and Exlusion - Product Bug?

[i801977]

I should pay no US Tax but Turbotax does not bring me back to the orginal "federal tax due" I started with.

Here is what i did

1 I took note of my "federal tax due" before starting with the Foreign Earned Income and Exlusion section.

2 I entered the foreign earned wages. The Federal Tax Due went up

3. Then I went successfully  through the secton to qualify for exclusion. TurboTax gave me the thumps up and confirmed "no US tax to be paid on this amount " 

Problem: My Federal Tax Due shows 7k more than when i started with the Foregin Income and Exclusion Topic.

Product Bug or User Problem?  How can i correct it?

[i801977]

I have not seen any responses on this issue.  Here an additional information: I've  deleted my foreign wages and my "federal tax due" jumped correctly back to my starting point.  Since i should not pay any tax (because of succesful exlcusion) but my tax increase when entering the foreign wages i am guessing i am dealing with an software bug here.   

Who can help - for instance is there an product support help desk from TurboTax?

[JamesG1]

Please clarify.  Did you reach the screen Here's the amount of Foreign Earned Income you can exclude?

Did you qualify under the Bona Fide Resident Test or the Physical Presence Test?

What dates living abroad did you report?

Did you claim a foreign housing exclusion?

You may always elect to file your tax return with expert help.  See this TurboTax Help.

To elect expert help, select Get expert help in the upper right hand corner of the screen.

[i801977]

- Yes, I qualified under Physical Test

- dates are from 1/1 -12/31

- no foreign housing exlcusion

[i801977 · Accepted solution]

I think i found the (surprising) answer to my problem (with the help of AI) :  

 U.S. tax can still go up on foreign earned wages even when those wages are excluded under the Physical Presence Test, especially in a Married Filing Jointly (MFJ) return (which was the case in my case). Here is why:

-  The excluded foreign income itself is not taxed.

-  But it can increase the tax rate applied to your other income (including your spouse’s income). 

This is called the “stacking rule.”

Under the Foreign Earned Income Exclusion (FEIE), the IRS does not simply remove the excluded income from the tax calculation.

Instead, the IRS:

1. Calculates your tax rate as if all income were taxable
2. Applies that higher rate only to your non-excluded income

So while the foreign income is excluded from tax, it can push the rest of your income into higher tax brackets.

How this affects Married Filing Jointly ?

In an MFJ return:

• Both spouses’ incomes are combined
• Even if only one spouse has foreign earned income excluded
• The entire household’s tax rate can increase

Example (simplified)

• Spouse A (working abroad):
  • $120,000 foreign earned income
  • $120,000 excluded under FEIE
• Spouse B (U.S. job):
  • $80,000 taxable income

Without stacking:

• $80,000 might be taxed mostly at 12%–22%

With stacking:

• IRS pretends total income is $200,000
• Determines tax bracket based on $200,000
• Applies that higher rate to the $80,000

✅ Foreign income still not taxed
❌ But tax on the $80,000 is higher than expected

[DaveF1006]

Yes, that is exactly what happened. It's called "stacking". Here is how it works.

The IRS requires that any other income you have (like U.S. interest, dividends, or U.S. wages) be taxed at the rate that would apply if the foreign income were included.

1. Without Stacking: You have $10k of U.S. interest. You'd expect to be in the 10% bracket and pay $1,000.
2. With Stacking: You have $130k in foreign income (excluded) + $10k U.S. interest. The IRS "stacks" that $10k on top of the $130k. Instead of being in the 10% bracket, that $10k is now sitting in the 24% bracket.
3. The Result: Your tax on that same $10k jumps from $1,000 to $2,400.

If the stacking rule is hitting your U.S. income hard, you might consider the Foreign Tax Credit (FTC) instead of the Exclusion (FEIE).  You can try to claim the Foreign Tax Credit instead to see which method will give you a better result on your tax return. The only problem is if you claimed the FEIE in the past, you generally cannot switch back to the Exclusion for 5 years without IRS permission.