Form 1116 and Form 2555 round and round in circles

Forum|Forum|2 years ago
January 9, 2024
2 replies
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This is bananas.

I am a US citizen living abroad. I used the ONLINE Turbotax software last year (2021) and did not have a problem filing the tax return. For 2022, I am trying to use downloaded Turbotax Deluxe 2022 software for Windows desktop and don't understand why I am being forced to include a Form 2555 (I did not file this form last year). All of my income is foreign and I paid tax at source in the foreign country.

I do not want to use the Foreign Earned Income Exclusion (FEIE), I simply want to use a foreign tax credit (based on the taxes I already paid). Based on this objective should the program not calculate the taxpayer's US tax liability via 1040 and then post-completion of 1116, apply any tax credit to reduce that liability? What does 2555 have to do with anything?

Because the program is forcing me to use 2555 (on the assumption I want to use the FEIE, it is doubling my income (1040 income on 1a is being added to Foreign Income on 2555), taxes paid is not doubling and so I have a tax liability even though I should not: (1) I paid full freight income taxes in the UK plus I even have a FTC credit carryover from last year).

There is something messed up in this program. Anyone face this issue? Any resolution?

DoninGA

Employee

See this TurboTax support FAQ for entering the Foreign Tax Credit on Form 1116 - https://ttlc.intuit.com/turbotax-support/en-us/help-article/import-export-data-files/enter-foreign-tax-credit-form-1116-deduction/L5jnSn5Vm_US_en_US?uid=lr6wfo1j

EdgemanAuthor

Thanks for your reply. Yes, I have seen that page and attempted to follow its instructions. There is no getting around it: the software is flawed and Turbotax needs to fix it.

Step 2 of the page that you sent tells you to "Enter all your foreign income in Wages & Income if you haven't already".

Now, there are two places in the Wages and Income section where this could go: (1) US Wages and Income i.e. Box 1, and (2) Less Common Income: Foreign Earned Income and Exclusion. Given my objective to take the Foreign Tax Credit and not the FEIE, I believe I should be entering the foreign income in Box 1. In fact, I think that's the whole point, as Turbotax' own tutorial will tell you "If you do not include wages earned in another country as part of your U.S. income, you cannot claim a credit for foreign taxes paid on those wages". The first software problem is that you can't so this in Step-by-Step mode as it won't give you the option to enter income without a W-2, so you have to enter this income in the Forms view. This foreign income is then captured as Wages and Income. So far so good. The income is captured in Box 1.

I then have to ignore the Less Common Income: Foreign Earned Income section of the Wages and Income module. Why? Because if you go through it, you get to an interview question that states "Enter Your Foreign Earned Wages (this could include wages or payments from a foreign employer or cash". If I enter the same income number in here as I did in Box 1, the software double counts the income. You can see it in the Tax Summary in Forms view (it takes 2x the income and from that deducts the allowed foreign income exclusion, which is meaningless as it should not be counting the income twice). On this basis, as stated, I have to declare zero Foreign Earned Income in the Less Common Income: Foreign Earned Income section.

Now if I go the Foreign Tax Credit section as the page you sent suggests, and follow the steps, there is no point where it asks for the income you earned in the foreign country (in my case the UK). It does ask you for Other Gross Income (none), Definitely Related Expenses, and Foreign Losses. It then asks for Foreign Taxes Paid (as it should). I have entered this into the software (the taxes were automatically withheld). The taxes were paid and not accrued. I then complete the rest of the interview firstly without entering last year's Foreign Tax Credit Carryover amount and the software is still showing a US Federal tax liability which makes zero sense: (1) my tax rate in UK is higher than in US, (2) there is some benefit from the standard itemized deduction. Something is broken and I can't figure out what it is. If I go to Forms view and look at the Tax Summary, my total credits does not capture any Foreign Taxes Paid at all.

Plus despite having zeroed out the Less Common Income: Foreign Earned Income section of the Wages and Income module, the Forms view is still showing that I have errors in Form 2555. There should not be a Form 2555!!!!!!

EdgemanAuthor

I forgot to add the Step by Step mode shows zero Foreign Taxes once I was done, even after entering this as per the interview.

Todd123

Yes, me too. It doubles my income. I didn’t realize till just this year. I paid withholding out of the country and on a W-2 as well. I saw your comment and same thing. I worked for a US company that had no office in the country I was working. Paid withholding on a US W-2 and paid withholding in the foreign country. How we can get an answer.

pk12_2

Employee

@Todd123 , please tell me more on your specific situation either on this thread or PM.

(a) I do not understand how you had withholding in the foreign country ( which country please? ) while getting a W-2 in the USA. Because without having local presence , how did the US company manage that.

(b) When did you enter that foreign country ( exact date ) and when did you leave ( if you are no longer on that foreign assignment )?

(d) Did you family live there with you or did they stay back in the USA ( with or without US income ) ?

(e) Is this your first year in the foreign country ? I know your post suggests that you have been paying both countries for some time -- I need the specifics, please ?

I will circ le back once I hear from you

Are there other things I can help you with ?