I was notified by the IRS of a calculation error in my 2021 tax return completed using TurboTax Deluxe. The error is that TurboTax does not correctly calculate the taxes due when confronted with foreign source income, which is excludable and the only other income being dividends, approximately 95% of which is qualified. I recomputed the tax due by hand and found the IRS calculation to be correct. Here are the salient facts so you can find and correct the error. I suspect the error has been present for a number of years and would like to see it corrected for the 2022 tax year.
Single filer taking standard deduction
Foreign earned income $63,100, all excludable under foreign residency requirements
Dividend income $14,755, qualified $14,309
Turbo tax computes tax due of $331; IRS computes tax due of $0 with explanation: "We changed the amount of tax reported on your tax return because the tax rates on Qualified Dividends and Capital Gains are generally lower than the standard rates. It appears your tax was not computed using these rates or the amount of tax was computed incorrectly."
Never mind. I recalculated the tax by hand a second time and found an error I made on my first try. The result being that TurboTax calculations were correct and it is the IRS that is wrong. Contacting telephone support was helpful as the person I spoke with was able to provide a way for me to send a report directly to TurboTax although she didn't seem particularly knowledgable about how TurboTax did its calculations. For what its worth, on the Foreign Income Exclusion worksheet, TurboTax buries the steps that the IRS requires you to calculate using two passes through the Qualified Dividends worksheet. The Qualified Dividend worksheet that TurboTax completes is not applicable, is correctly ignored by TurboTax but does confuse any person looking over the worksheets to figure out what TurboTax is doing.
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