Foreign income exclusion not registering self-employed income

[slsbath]

I have lived and worked solely in the UK (both employed and self-employed) for 6 years and have always been exempt from tax under the foreign tax exclusion. This is the first year I have tried to use TurboTax instead of an accountant and it's saying I owe money on my self-employed income even though my earnings are under the exclusion amount of $105k. It seems as though when I enter the self-employed income under the Business section that it doesn't recognize it's a UK business and I see no option to change it to foreign business. In the personal category I am able to put both employed and self-employed income and calculates my exclusion to be for the full amount of both earnings. However, it is still saying I owe 'federal tax' on the business income from the business section. Can you please advise whether or not I can leave the self-employed income out of the business section as it was all foreign earned (it would still be included in the personal section)? Or maybe there is an option to show that income is foreign earned in the business section? Any help would be appreciated! Thank you!

[rjs]

Enter all your foreign self-employment income in the business section. You do not indicate anywhere in the business section that it's foreign income.

After you have finished entering the business income, type "foreign income" (without the quotes) in the Search box, then click the link that says "Jump to foreign income." After you answer Yes to whether you made any money outside the U.S., the next screen will ask you what form or statement the foreign income was reported on. Check the box for "A Form 1099-MISC or other self-employment income." On the next screen enter the amount of your self-employment income that was earned outside the U.S. (which might be all of it). Continue through that section to claim the foreign earned income exclusion.

[slsbath]

Hi @rjs 

Thank you so much for your reply. I am still getting the same thing where It says all my income is valid for exclusion (which is correct) but then the "federal tax due" at the top of the screen lists an amount due and won't disappear. When i review the whole return it says i owe federal taxes which i know from previous years is not the case. 

It always comes up whenever i enter income into the business section for my self employed income. I can't ever seem to get the system to recognise that business income as foreign and valid for exclusion even though when i file for exclusion it says its all valid.

Very confusing, sorry to be a pain but any further advice welcome. 

Many thanks. 

[rjs]

The tax that you are seeing is probably self-employment tax, not income tax. The foreign earned income exclusion does not eliminate the self-employment tax. In past years, when you were an employee, not self-employed, you would not have had any self-employment tax. (If you had net self-employment income of less than $432 there would have been no self-employment tax.)

Look at your Form 1040. Is line 12b zero? That's your income tax. The self-employment tax (and possibly other less common taxes) is on line 15. If line 15 is equal to your total tax on line 16, then self-employment tax is the only tax you are paying. You can't eliminate that. If line 12b is zero you are not paying any income tax.

[rjs]

Investigating further, I see that under the tax treaty between the U.S. and the U.K. you are exempt from paying U.S. self-employment tax if you paid tax to the equivalent U.K. social security system on your self-employment income. You have to get a statement from the appropriate U.K. agency verifying that your self-employment income was subject to the U.K. tax. This might be what you did in past years when you had self-employment income.

TurboTax doesn't really handle this situation, but there is a way handle it in forms mode. You will not be able to e-file your U.S. tax return. You'll have to print it and file it by mail. If you did pay the U.K. tax and you have the necessary statement, post back and I'll give you detailed instructions for how to do it. I may not get back to you until late this evening U.K. time, or tomorrow morning.