Foreign Earned Income Exclusion & Foreign Tax Credit

Hi, all.

If one's tax household is outside the US and they earn income from a foreign entity with which there is a tax treaty, can they deduct both the foreign earned income exclusion AND the foreign tax credit? I would think not.

I live and work in Switzerland and get paid by a Swiss company. If I take the exclusion, can I take the foreign credit, or are they combined? So even if I earn over the $85k for the exclusion I can still deduct the foreign tax.

Thanks...

Reply to
ben.a.bowen
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Yes, you do get to take both, but the foreign tax credit is reduced by foreign earned income exlusion. See the instructions for line 12 ("Reduction in foreign taxes") of form 1116.

Line 12

You may have to reduce the foreign taxes you paid or accrued by the following items.

  • Taxes on income excluded on Form 2555 or Form 2555-EZ. Reduce taxes paid or accrued by the taxes allocable to any foreign earned income excluded on Form 2555 or Form 2555-EZ. If only part of your foreign earned income is excluded, you must determine the amount of tax allocable to excluded income. To do so, multiply the foreign taxes paid or accrued on foreign earned income received or accrued during the tax year by the following fraction.

Numerator: Foreign earned income and housing amounts you excluded for the tax year minus otherwise deductible expenses (not including the foreign housing deduction) allocable to that income.

Denominator: Your total foreign earned income received or accrued during the tax year minus deductible expenses (including the foreign housing deduction) allocable to that income. However, if the foreign jurisdiction charges tax on foreign earned income and some other income (for example, earned income from U.S. sources or a type of income not subject to U.S. tax) and the taxes on the other income cannot be segregated, the denominator is the total amount of income subject to foreign tax minus deductible expenses allocable to that income.

See Pub. 514 for a comprehensive example.

[More rules follow]

So if your salary is 90k you may not get any foreign tax credit after the exclusion, but if 1M then probably.

Reply to
removeps-groups

Thanks for the reply. I hadn't seen the instructions for form 1116 before I had posted.

Reply to
ben.a.bowen

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