FOREIGN TAX EXCLUSION

[gk]

Hi,

Married couple , wife work in USA and hubby in UAE. Hubby made $47000 and no tax paid , so i took $47k exclusion. Only with wife's income they are getting $2000 refund and when i add hubby's income and exclusion for the same amount  their Tax liability increasing and owes $500. Did i make any mistake? I don't have much experience on this. Why Tax liability increases even though i took Foreign tax exclusion. Please reply

GK

[Norman2001 · Accepted solution]

You don't provide enough details to give a definite answer. But, if you look at the Foreign Earned Income Tax Worksheet you'll see that the exluded income is taken into account when calculating the tax. Even though the excluded income is not taxed, it pushes the spouse's income into a higher tax bracket. Hope this helps.

[gk]

Hi Norman,

You gave me the correct answer. This  was the answer i was looking for. That is a strange rule, if the foreign income increase the Tentative Tax  then what is the use of this exclusion. 

Thank u so much

GK

[sjrcpa]

Try rerunning the return without the foreign earned income exclusion and you'll see.