When you have Foreign Earned Income (FEC) and can exempt it from your return, your tax is calculated differently than when you use the Tax Table. Your tax is calculated using all of the income before the foreign income exclusion. Then, the tax is figured without the foreign income included. The difference in the tax on your total taxable income before excluding FEC and your actual taxable income after excluding FEC is the amount of your tax.
According to the instructions for form 2555 (Foreign Earned Income), you must complete the Foreign Earned Income Tax Worksheet to calculate the tax on line 11A of the 1040.
The tax calculation is figured as follows:
- Calculate the tax on your total taxable income on line 10 of the 1040
- Calculate the tax on your total taxable income plus the excluded foreign earned income
- Subtract the tax figured in step 1 from the tax figured in step 2
- This amount is transferred to line 11A of the 1040 form.
When you complete Form 2555 in the program, the tax will be automatically calculated on your return.