Foreign Income Exclusion & Tax Rate

[fungdaddy]

I've been able to successfully exclude the income I earned through 6 months of working abroad in 2021. However, while the income was excluded my federal taxes increased. Why is my income being taxed higher if I was able to successfully exclude all of my foreign income earned in 2021? I should note that I worked in the States for the last 6 months in the USA and have a W2. My tax rate on what I earned in the USA increased when I included my foreign income even though it was all excluded.

[DaveF1006]

If possible, can you send us a sanitized version of your return so we can look at it more carefully? 

To send if you are using Turbo Tax online, go to tax tools>tools>send tax file to agent. When you select that, it will give you a token number to give to us. Tell us what that token number is.

If you are using Windows Desktop, select the online button at the top>send tax file to agent.  This will also bring up a token number.  Kindly tell us what that is. 

When you send us this file, it removes all of your personal information and just send us the "sanitized" version with just numbers in the various tax forms.

When you send the token number, please address @DaveF1006 at the end of your post.

[fungdaddy]

Hi Dave - I've already submitted/filed my tax return. I can send you the completed file if you want. I think what happened is that my total salary/wages included my foreign income AND US income which put me in a higher tax bracket. My taxable income was reduced by my foreign income exclusion (all my foreign income) and my standard deduction for married joint filing. However, the taxable income remaining was taxed at a higher tax bracket which made my federal taxes slightly more than what I paid on my W-2 for my US income (hence me owing money). When I was doing my return, I was playing with the amount of my foreign income and I would immediately see my federal tax amount change as well. Let me know if this makes sense but I am happy to send you my return as I no longer see Tax Tools on my page because my federal return has been accepted by the IRS.

[DaveF1006]

Yes, since you are using Turbo Tax online, in your landing page after logging in, go to the button that says add a state. This will put you back into the tax return and then follow the procedure I outlined above.

@fungdaddy

[fungdaddy]

Hi Dave - My token number is 998108. This is for  @DaveF1006.

Please let me know if you need anything else

[DaveF1006 · Accepted solution]

Good morning !! I had a chance to look at your case and here are the results.

1.  I did notice there was difference in the tax rate without the exclusion and with the exclusion. Without the exclusion, the tax rate was 15.4% and with the exclusion 22%. 
2. In further analysis, I looked at the Foreign tax Exclusion Worksheet and found my answer.
3. Even though you were able to exclude your foreign income,  you weren't able to exclude the tax assessed on the full amount of the income. You are probably thinking that "this isn't right."
4. After searching the Foreign Income Exclusion IRS site, it states the following, "If you qualify for and claim the foreign earned income exclusion, the foreign housing exclusion, or both, must figure the tax on your remaining non-excluded income using the tax rates that would have applied had you not claimed the exclusion(s) 
5. That is why your tax rate for the excluded income is higher because the tax liability is determined  on your overall AGI, which includes the Foreign Income that was excluded.
6. Still, the difference between owing more than $10,000 in taxes versus owing $237 is sizable.
7. Hope this helps. 

@fungdaddy

[fungdaddy]

Thanks Dave...this is what I thought. This is much appreciated. Many thanks!!!