Possible bug in turbo tax after filling in Foreign Earned Income Exclusion

[taxericko]

I think I might have found a possible bug in Turbo Tax with Foreign Earn Income Exclusion where tax are not calculated properly.

This is the behavior which I observed last year as well (and I probably overpaid)

1. Fill income for myself via W-2

2. Fill in my wife income as FEIE and becos it is less than 120k and she pass the physical presence test, turbotax says she qualifies.

3. However, my total tax liability still went up by a huge amount.

Now, I am puzzled... so I printed 2 copies of 1040 (one with and one without my wife income in line 1h)

When I compare side by side... both forms for 1040 line 15  - taxable amount is the exactly the same value!

However, line 16's value is different!

I used this link https://turbotax.intuit.com/tax-tips/irs-tax-return/current-federal-tax-rate-schedules/L7Bjs1EAD
to calculate the tax value in line 16 and I got the exact match! but I could not figure out how TurboTax derive the amount with FEIE enabled.

Will this be a bug ? should line 15 be the definitive value to get to line 16 ?

[pk]

@taxericko , without having the exact numbers it is difficult to opine whether  TurboTax is correct or not.  However,  the tax computation for purposes of Foreign Earned Income Exclusion ( FEIE) is a little bit convoluted.

There is a separate worksheet  in TurboTax doing this computation.  The way it works is   (a) compute  tax liability  based on total world income ( including the  Excluded income;  (b) subtract  the tax attracted by the excluded income ONLY.  Thus it always pushes you into a higher bracket ( marginal Tax  rate ) and  then  subtracts the contribution of the  excluded  income as if it were the ONLY income.

This is not a bug -- this is per IRS instructions.

Does this help explain your issue  or is there more ?

pk

[taxericko · Accepted solution]

Thank PK,

This is the answer I am worried about. But it is what it is... for more information on this complex tax compute, can you send me the link where is the 'logic; for it ?

I can find the tax table for 2023 Tax Computation Worksheet

here: https://www.irs.gov/publications/p17#d0e50213

But where can I find the one with FEIE ?

Thanks in advance

[taxericko]

I google and I found this:
https://support.taxslayer.com/hc/en-us/articles/[phone number removed]-Why-am-I-being-taxed-on-my-Fo...

Is this about right ? Would be great to have the instructions from IRS and not some random website

[pk · Accepted solution]

@taxericko  please page 35  of 1040 instruction:

2023 Instruction 1040 (irs.gov)

"Foreign Earned Income Tax Worksheet—Line 16"

is there more I can do for you 

[taxericko]

Thank is a good information! Thank you!

[suzandrew]

I'm also having similar issues.

I live overseas and do not make a lot of money ($30k). And there is a bunch withheld.

This year, when I did the Foreign Income Exclusion, I qualified and it said all my income was excluded.

BUT... my return went way down.

It happened as soon as I put in my dates of living overseas. As soon as it saw I lived overseas for the year, my return went decreased by 80%.

Previously, making about the same amount of money, as soon as I excluded my income, my return went way up. This year was different. Wierd

[taxericko]

How does this happen... mine went up every year... but this is becos I am filing for myself and my wife... My income is USA and her is overseas.

[pk]

@suzandrew , please tell me more about your exact situation ---- total foreign income, which country, foreign days during 2023,  US /domestic income, filing status.

As I have mentioned above  1040 instructions shows the  FEIE and tax computation thereof, but it should not result in  very large  change in tax liability.  Also some credits may be disallowed  based on  the exact  facts and circumstances.

Will circle back once I hear from you 

pk