Foreign Income Exclusion

[JON]

Do not do many, but this one has a bad result that is probably right.

The exclusion amount is easy, but how they calculate the tax has a built in penalty. You take the taxable U.S. amount to the form and add the exlusion amount to that and calculate the tax. You subtract from that the tax on the exclusion amount from the tax tables. So in my case the calcultion for the first tax puts a lot of your income in higher brackets, but for the second calculation the subtraction you use the 15% bracket and up.

Result your taxable US income gets moved to higher brackets and the exclusion deduction goes out at the lower brackets.

I wished I would have explained that to the client first. I did not think of it.

Anyone disagree-Ultra Tax computes.

[Bees Knees]

I'm not sure what you are talking about. After figuring the exclusion amount, Part VIII, line 45 of Form 2555 says to carry the exclusion to line 21, Form 1040 as a negative number. That means it is subtracted from taxable income from the top, which results in a deduction from the top marginal tax rate.

[Gene V]

I think this is one Jon is talking about.

For MFJ—Say you have $20,000 of wages and no other income, after your standard deduction and personal exemption, your taxable income is $3,100 and tax is $313, which is in the 10% Marginal tax rate.

Now for foreign earn income: Say you have 102,400 of foreign wages and no other income, after your foreign deduction of $82,400 line 21 and your standard deduction and personal exemption, your taxable income is $3,100 (same as first example) and tax is $775, which is in the 25% Marginal tax rate.

Even if your taxable income is the same, your tax rate is higher when you have foreign income excursion

[DonPriebe]

But then ...

I'm not sure what you are talking about. After figuring the exclusion amount, Part VIII, line 45 of Form 2555 says to carry the exclusion to line 21, Form 1040 as a negative number. That means it is subtracted from taxable income from the top, which results in a deduction from the top marginal tax rate.

When you get to line 44 and calculate your tax, you must use the "Foreign Earned Income Tax Worksheet" on page 37 of the 1040 instructions. That's where they compute the tax with no foreign exclusion, compute the tax on the foreign income by itself, and then have you pay the difference.

[Bees Knees]

I don't see that worksheet in the 2005 1040 instructions. Is that a new way to calculate the tax for 2006? The 2005 Form 2555 likewise tells you to enter the exclusion as a negative number on line 21, but nothing in the 2005 instruction booklet tells you to use a special worksheet to calculate tax if claiming the foreign earned income exclusion.

When did that law change?

[DonPriebe]

New "feature" for 2006

I don't see that worksheet in the 2005 1040 instructions. Is that a new way to calculate the tax for 2006? The 2005 Form 2555 likewise tells you to enter the exclusion as a negative number on line 21, but nothing in the 2005 instruction booklet tells you to use a special worksheet to calculate tax if claiming the foreign earned income exclusion.

When did that law change?

The book published by the kind providers of this forum says that it is new for 2006. (page 1-10)

[Gene V]

The book published by the kind providers of this forum says that it is new for 2006. (page 1-10)

Bees Knees--its a good thing you're not using the name Brad.

I wonder how many software programs calculate the tax correctly?

[Bees Knees]

Bees Knees--its a good thing you're not using the name Brad.

I wonder how many software programs calculate the tax correctly?

You think I actually pay attention to everything I write?

Yes TTB got it right. But all it says is there is a new worksheet in the 1040 instruction booklet to use. It doesn't say what law change resulted in the 1040 instruction revision.

Is IRS making up new tax law?

[JON]

So we do agree

this is a NEW method of collecting more taxes-2006. Computing the taxes with the foreign excluded income and then subtracting the taxes on the excluded income. The taxes on the excluded are assessed at starting at the lowest bracket. Iraq contractors quailifing for the exclusion become a NEW source of tax revenue with the change...

I guess it should not be a surprise.

[Bees Knees]

Public Law 109-222 amended Code Section 911, the foreign earned income exclusion code section in 2006. However, I can't find anything in that amendment that would change the way tax is calculated. Maybe it is there buried beneath a whole pile of junk and I need new glasses. At any rate, the new worksheet found in the 2006 1040 instructions appear to have created a new way to calculate tax when the foreign earned income exclusion is claimed.