When you have Foreign Earned Income (FEC), you may qualify to exempt up to $112,000 (2022) of that foreign income from your return. If you are able to exempt your foreign income, your tax is calculated differently than when you use the Tax Table.
How is the tax calculated?
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 15 of the 1040.
The tax calculation is figured as follows:
- Calculate the tax on your total taxable income on line 15 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 the 1040 form.
How do I report this in my account?
When you complete Form 2555 in the program, the tax will be automatically calculated based on your entries.
The Foreign Earned Income is reported:
- Federal Section
- Income
- Less Common Income
- Other Compensation
- Foreign Earned Compensation
The Exclusion is reported on form 2555:
- Federal Section
- Income
- Less Common Income
- Foreign Earned Income Exclusion 2555