Follow these steps to report foreign withholding from foreign income (W-2 equivalent) to generate a Foreign Tax Credit:
- Go to Screen 35.1 Foreign Tax Credit.
- Scroll down to the section Income from Sources Outside U.S.
- Select the country in the Name of foreign country dropdown.
- Select the income category from the Category of income [Ctrl +T] dropdown.
- Scroll down to the Foreign Taxes Paid or Accrued section.
- Enter the withholding in Other foreign taxes under the U.S. Dollars subsection.
The foreign income exclusion income will be applied to any foreign taxes entered in Screen 35 and the appropriate foreign tax credit amount will be calculated and will flow to Form 1116.
Per the Form 2555 instructions, Page 2, Foreign tax credit or deduction:
"You cannot take a credit or deduction for foreign income taxes paid or accrued on income that is excluded under either of the exclusions. If all of your foreign earned income is excluded, you cannot claim a credit or deduction for the foreign taxes paid or accrued on that income."
This is the reason Lacerte won't generate a Form 1116 credit if the income is excluded on the Form 2555.