Double taxation even with FEIE

[taxbreak1004]

I worked in the US and my wife worked abroad in 2023. I filed married filing jointly and took advantage of FEIE for the fulll amount she earned abroad. I thought FEIE would wipe out foreign earned income and would basically pay taxes only for what I earned here in the US but discovered that is not the case. I ended up paying thousands of dollars more than what I would have paid if only my income was reported. 

Let's say my total US income was $100,000, taxable income (line 15 of 1040) was $70,000 and my wife earend $50,000 abroad.  Using the tax table in Form 1040, tax (line 16 of 1040) for taxable income of $70,000 is $7,963. However, when you have FEIE, you use FEIE worksheet for line 16 which is to add my taxable income of $70,000 with wife income of $50,000 for a total income of $120,000 and calculate the tax for $ 120,000 minus the tax for $50,000. Using tha tax table and computation worksheet for line 16, it is $17,015 - $5,563 =$11,452. 

So you are basically paying $3,489 more even with FEIE in this example. ($11,452-$7,963) My point here is that when foreign income is excluded under FEIE, it should be calculated as if there was no foreign income which would result in tax liability of $7,963. However, all earned income globally is added ($120,000)/taxed($17,015) and then subtracted with tax calculated from the income earned abroad($5,563). 

I think this is not "foreign earned income exclusion". It is just exclusion of tax from foreign earned income (from total global income). FEIE still makes sense for those whose income is mostly from abroad. But in a situation like this when there is earned income both in US and abroad, you end up paying considerable more than what you would expect to be.

(I thought about changing filing status to married filing separately so that I can report only my income. In the above example, tax from taxable income of $70,000 would be $10,713 which is less than $11,452. However, my standard deduction would be way lower and taxable income would be much more that $70,000.)

My question is:

- Is my findings/reasoning above correct?

- Is there any way to lower taxes with FEIE as if I am filing taxes with no foregn income?

It is very frustrating when you reasonably expect foreign income to be excluded with FEIE only to find out that you end paying considerable amount of tax, almost $3,500 in this example.  Thank you.

[rjs]

I think your understanding of how the tax is calculated is correct. The calculation is done according to the tax law, not according to your wishes or expectations.

It's not double taxation. You are not paying any tax on the excluded foreign income. But the foreign income is not completely ignored. Your other income, that is not excluded, is taxed at the same rates that would have applied to that income if you did not get the exclusion. The non-excluded income is "stacked" on top of the excluded income for the purpose of calculating the tax on the non-excluded income. Therefore the excluded foreign income pushes some of your other, non-excluded income into a higher tax bracket. So the added tax is additional tax on your non-excluded income, not tax on the foreign earned income.

There is no way to have your tax calculated as if you didn't have the foreign income. This is the way the foreign earned income exclusion works.