Foreign Earned Income Exclusion - Form 2555

[ETax847]

Client's spouse lived in Canada for the entire year and earned $45,000 US dollars for her work.  When I am completing the Foreign Earned Income Schedule to exclude the income,  the entire $45k is showing up on Line 8 "Other Income" as a negative amount.  I would have expected this income to just be excluded not be a deduction.  Any idea as to why this is being reported as it is on the 1040?

[ETax847]

I figured out what the issue was as I forgot to check a box.  Now the foreign income flows through to the 1040 and is backed out from Form 2555, however, there is tax still being calculated on this income.  If the foreign income is excluded, why is the foreign earned income still being taxed.

[BTS]

We use Proseries and I've done a few of these 2555's for our military contractors.  Not sure what program your using.  

[ETax847]

BTS, in proseries is the excluded income still subject to tax? In ATX, in the tax calculation it still is taxing that portion of income to some extent.  Also, there is no credit allowed for Foreign Tax Paid.  Any idea why?

[Lion EA]

You use either the foreign earned income exclusion OR the foreign tax credit. I don't use Proseries, but you might need to check a box or enter the earned income on a specific screen. Make sure you have her start and end dates entered.

Form 2555 to Schedule 1 Line 8 to 1040 Line 8 as a negative number that effectively reduces her wages on line 1 that are a positive number.

Make sure you have all the T and S and J designations correct.

[joanmcq]

And the taxpayer is taxed as though the $45k is taxed.  So if your client has 45k in wages (excluded), and $100k of other Taxable income, the 100k is taxed as though taxable income is $145k. 
The way the foreign income exclusion works changed under Bush. Expats aren’t a big lobbying force. 

[ETax847]

That explains it! Thanks everyone for your valuable insight.  I was not aware of the change that happened under the bush administration regarding the tax treatment.  

[Randall]

On 3/14/2023 at 10:09 PM, joanmcq said:

And the taxpayer is taxed as though the $45k is taxed.  So if your client has 45k in wages (excluded), and $100k of other Taxable income, the 100k is taxed as though taxable income is $145k. 
The way the foreign income exclusion works changed under Bush. Expats aren’t a big lobbying force. 

Yes, the taxed income (minus exclusion) is taxed at the higher rates as if the total income were taxed.