FTC vs FEIE

Agree.

Calculate tax on on 175k which you did above, then best case subtract the tax paid to Canada, which gives you 25070. But this best case. Use form 1116 and put in 60k of Canada income and 12k of tax. Let the computer do the math, but I think it works like this: Your effective tax rate with the 60k is 37070/175000!%. The Canadian tax rate is

12k/60k %. Because US tax rate is more, you get credit for the full 20k. If US tax rate was 19% (say due to some more credits you decided to take), you would only get credit for a portion of the Canadian taxes paid -- probably 19% of 60k = 11400, with 600 carried over to next year and beyond, although it might not be usable next year. However, maybe form 1116 will ask you to calculate the tax rate without the 60k, which will likely be less than 21% because less or none of your income will be in the 33% tax bracket, and thus you won't get the full credit. I don't know what the form does and am too lazy to look it up. Plug it in and let me know what happens. In TaxAct they have the actual forms where you can enter numbers, as opposed to the wizards of TurboTax, and if you are tax geek this might be better.

Yes you can mix both FEIC and FTC. On form 1116, enter a new category of income, namely investment income of Canada (the first category if you chose the FTC would be salary income of Canada), with income as $1000. Calculate Canadian tax due on this amount. I don't know if form 1116 will still ask for the total US effective rate, which above we found to be about 21%, or whether it will ask for the US rate on this piece of income, which may be just 15%.

I think that it might work that way in principle, but that's not how the form goes. (I did some work on it since my last posting.) What it seems to do is calculate the ratio of Canadian income to total income. If that ratio is 30% (as in this example), you cannot take a credit for more than 30% of the tax due. However, there are some nuances. There seem to be special rules for handling mortgage interest and property taxes. I'm not sure, but it looks like I have to take 100% of my wife's property taxes off her Canadian income before computing the allowed percentage. And also, the mortgage interest seems to be allocated between USA and foreign income whether the property is in the USA or not.

At the moment, though, I'm coming up with tax due of $2500 less using the FTC, which makes me happy, and doubly so because I would rather not have to say she is a "bona fide resident of Canada" which could come back to haunt us later in immigration. (She has her green card, but she could lose if if she does not actually reside in the USA. "Reside" can be a somewhat flexible term, but saying she is a bona fide resident of Canada won't exactly help!)

Now if I can just figure out where to put the damn numbers into TurboTax!

I also noticed something curious

There are two "percentage" calculations. One is the calculation of deductions from foreign income. If, for example, 25% of your income is from foreign sources, then you deduct 25% of your deductions from your foreign income. The other is the ratio of foreign "taxable" income to total "taxable" income. I put taxable in quotes because it's not exactly that, I think it is before personal exemptions.

The formula for the latter calculation is clearly prescribed. However, the former requires a denominator of "total income" which is NOT clearly defined. Turbotax seems to include salary deferrals and maybe even some other items in the denominator, items which are not taxable. A larger denominator leads to a lower tax, because it gives a smaller percentage of deductions to be excluded from foreign income before using that as the numerator in the second calculation.

Is that the right way to do it though? (I hope it is.)

Yep, I can see that on form 1116. I'm not too familiar with this form. Regarding your question below, I don't know. What line number are you talking about?

Do salary deferrals apply in your case? What other items are included in total income -- you mean muni bond interest?

I was able to dig a little deeper into Turbotax. What it includes in "total income" is - pretty weirdly - Schedule E gross rents, with no deductions of any kind, and Schedule C gross income, with no deductions either. (I think you actually deduct cost of goods sold, but that doesn't apply to me since I am selling services, not goods.)

Turbotax also does some other things that I think are weird. You have to allocate deductions (which I think are not exclusively Schedule A deductions, but also adjustments to income). Some are automatically assumed to be pro-rated between domestic and foreign income, specifically real estate taxes, medical expenses, and sales taxes. Mortgage interest is subject to a separate allocation which is roughly done in proportion to income. But Turbotax lumps state income taxes into the bucket with sales taxes, and it took my self-employment tax and self-employed 401(k) contributions and put them in the category of "Not definitely allocatable" to USA or foreign income - I think those are pretty clearly related to USA income, since they are my income (as opposed to my wife's) and I only work in the USA.

That part about including gross rent and gross self-employed income before expenses kind of blew me away. (And the calculation works in my favor.) My gross rent on Schedule E was $12,450 and net income was $282.

It might be a good idea to do the steps with another tax program to see if it comes up different. The pro-ration thing looks strange to me.