Form 1116 when foreign earned income claimed

[mackayr]

I'm confused about how to complete Form 1116 when foreign earned income exclusion (Form 2555) has been claimed. To illustrate, here's a simplified (and extreme) example:

Canadian employment income - $18,000 (foreign earned income exclusion claimed for full amount)
Canadian employment insurance benefits - $6,000
US pension income - $12,000

Form 1116
Line 1a => $6,000 (ie. Canadian EI benefits)
Line 3a => $12,200
Line 3d => $24,000
Line 3e => $36,000
Line 3f => .6667
Line 6 => 8,133.74
Line 7 => (2,713.24)

Of course line 7 goes on to determine the US tax on that income. Assuming no adjustments on line 16 which make this amount positive on line 17, the calculation stops at line 17 as no foreign tax credit is available. Even if line 1a was higher than line 6, the amount on line 7 still remains disproportionately lower than it should be, resulting in a lower FTC than would intuitively make sense.

I've found several references online where accountants indicate that 2555 excluded income would *not* be include in lines 3d and 3e. Intuitively, this makes sense (ie. the amount of standard deductions attributed line 1a is not disproportionately skewed by the 2555 excluded income), but I haven't been able find an official reference to support this.

What am I missing?

[nelsona]

They are correc.t. And please use software to complete your 1116 along with your tax return.

[mackayr]

Hi Nelsona,

Thanks for the response. When you say "they", I trust you mean the accountants (just to make it clear for future readers of this post).

That's what I figured, but it certainly doesn't seem to agree with the instructions, at least on the surface.

Here's what the guide says:
https://www.irs.gov/pub/irs-prior/i1116--2020.pdf
Line 3d - "... Include any foreign earned income you have excluded on Form 2555 but don't include any other exempt income..."
Line 3e - "... Include any foreign earned income you have excluded on Form 2555 but don't include any other exempt income..."
Line 1a makes it clear to exclude 2555 earned income - "... Don't include any earned income excluded on Form 2555, Foreign Earned Income."

I agree with you (and the other accountants), since it doesn't make sense otherwise. Of course it's a false assertion to suppose the tax code always makes sense, but that's for another discussion.

As to your recommendation to use software, ironically that's what prompted me to end up here. Of course I've always used software, at least since 1998 (Taxcut). I'm an Intuit Proconnect guy now, but a fellow accountant uses CCH Axcess. Presumably as a result of "garbage in - garbage out", CCH has included the 2555 excluded income in both lines. This resulted in an unusual outcome, prompting him to bring this to my attention. After second guessing myself, I checked the guide to find the above references. Of course the guide is just that - a guide (it's not the tax code) - and it's not the first time I've found an error, but the above wording certainly seems to imply that 2555 excluded income should be included on those lines. Is that a typo, or is there another obvious meaning that I'm missing?

In any event, are there any CCH Axcess users out there who can advise on where to adjust these lines? I have no problem adjusting it in Intuit Proconnect with a couple of quick entries, but can't figure out where to make the change in Axcess.

[nelsona]

Then I would include it.
If the instructions an dthe sopftware say to include it, then .....

That is why I insidt on letting software figure it.

[nelsona]

Including it actaully does make sense.

[nelsona]

The purpose of 1116 is to give you as little tax credit as possible, and that is why it is prorated, takes into accont forwign losses, and appaerntly takes into account previously excluded income.