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Discussion Starter · #1 ·
Hi,

I'm a US citizen, self employed and working in Germany for many years, now trying to do the US taxes on my own.
For 2016 I filled out the forms 1040, 1040sc, 8938, 2555 and 1116.
After receiving a bill from the IRS I called and they said there was an error on the form 1040 on line 44, something about the tax not being calculated correctly.

After looking at the instructions again it seems that I should have used the "Foreign Earned Income Tax Worksheet" rather than the tax table in the 1040 instructions, however I don't know how to fill it out. Line 2a on the worksheet end up being 101300 (the maximum foreign earned income exclusion).

I don't know what to enter on line 2b of the worksheet ("Enter the total amount of any itemized deductions or exclusions you couldn't claim because they are related to excluded income").

It seems like calculating the tax using this worksheet would ignore the fact that the forms 2555 and 1116 should reduce the tax to zero.

I must have missed something... Any ideas?
 

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Have moved you over to the Expat Tax section on the forum. Doing US taxes isn't really related to the country where you're living - and we have LOTS of US taxpayers floating around here who may be able to help.

It seems like calculating the tax using this worksheet would ignore the fact that the forms 2555 and 1116 should reduce the tax to zero.
Not exactly. Form 2555 applies only to "earned income" - i.e. salary income or your earnings from a personal business that are equivalent to salary for the work you do in the business. (Pub. 54 explains this in much more detail.) And form 1116 just allows you to reduce any US tax by amounts of income tax paid to a foreign government on the same income.

If your salary income exceeds the max and/or you have "unearned" income (usually investment income) that is subject to local tax deferrals, benefits or exemptions, it's very possible you may still owe tax on your US return.

But let's see if we can find someone who can help with the FEI Worksheet. Two bits of information that might help would be if your "earned" income exceeds the max limit, and whether or not you have other sources of income that you are applying the foreign tax credit against.
Cheers,
Bev
 

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When you exclude income using form 2555 you must pro-rate any deductions and credits related to that income. So lets say (to keep it simple) you had an earned income of 110,000 and the FEIE was 100,000... you have excluded 90.9091% of your income. That means you must reduce any deduction definitely related to that income on Schedule A.

So lets say you have 3000 worth of deductions that you could claim on that earned income. You would only able to use 272.72 on schedule A

The remaining 2727.28 is what you would enter on line 2b.

Since they changed the way the FEIE was used to offset tax (any remaining balance is now taxed at the top marginal rate not the base rate for the balance) line 2b effectively is second type of deduction.
 

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Discussion Starter · #4 ·
Thanks for the replies. I sent in the revised forms. I guess I'll find out in a few months if it was correct this time.
 
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