Foreign Earned Income Exclusion and Foreign Tax Credit

[MJ50]

Hi,

Let's say you have $500,000 foreign earned income. Can you first get the Exclusion of $105,900 and then get the foreign tax credit from the rest of the foreign earned income which is $394,100?

[SusanY1]

Yes, you can combine the two in this way or you can use only the credit if it works out better for you.    Sometimes, because of the way the credit is calculated on the pro-rated income it can be better to use only the credit.  You are allowed to choose the option that works best for you. 

However, if you have taken the Foreign Earned Income Exclusion in the past and do not continue to use it, you can't "skip" a year.  Not taking the exclusion after taking it in years prior (without amending those returns) is considered revoking the election, and there is a five-year wait before it can be used again without IRS permission. 

To add the foreign taxes paid into TurboTax follow these steps:

1. Click on Deductions & Credits.
2. Scroll to Estimates and Other Taxes Paid and Click on Show More (you may first have to click on Show all tax breaks to see this section).
3. Click Start beside Foreign Taxes.

[MJ50]

How can you take both exclusion and the foreign tax credit?  When I take the foreign income exclusion option, it doesn't take the foreign tax credit. Could you tell me how to take both please?  Thank you.

[KarenJ2]

You must have foreign income greater than the exclusion amount of $105,900 + your foreign housing amount.

After completing all the screens in the foreign earned income exclusion, you need to go to the foreign tax credit section of TurboTax .

Proceed to the foreign tax credit section of the return 

1. First screen say yes you paid foreign taxes 

2. Go through a couple of screens answering the questions, Tell Us About Your Foreign Taxes say None of these apply Then continue 

3. Click you want the credit 

4. Do all of the following apply , click No as you have foreign taxes to enter 

5. Click through a couple screens and click the income category as General Category income 

6. Add the country where your foreign wages were earned.

7. Definitely Related Expenses , 

8. Enter your foreign taxes paid under Other Income on the Foreign Taxes Paid- Your Country screen

9. Country Summary - click Done 

10. Click through the screens until you come to the screen Reduction in Foreign Taxes, here you must enter your total foreign earned income exclusion (less related deductions)and in the second box enter your Total Foreign Income less related deductions.- This is to allocate some of your foreign tax to the excluded income as you can't take a credit on excluded income.  Form 1116 allocates the credit.