Foreign Earned income exclusion and the Foreign Tax Credit

Forum|Forum|7 months ago
November 26, 2025
2 replies
18 views

My client has earned income that qualifies for the Foreign Earned income exclusion. The total for each spouse is 100% covered on the limit. Additionally, one spouse has an Australian pension with foreign (Australian) taxes withheld. Where do I properly enter the pension income and withholding for the for Form 1116 (Screen 35.1)? My inputs result in these foreign taxes withheld allocated to the excluded income. The withholding is related only to the pension income not the excluded income under FEIE.

Am I on the wrong screen or missing a field entry?

Lacerte Tax

sjrcpa

Level 15

This is tricky.

Did they pay foreign tax on the earned income, too?

Best bet - print the1116 and instructions and fill out in pencil. Then look at 1116 on screen and use Jump to Input to figure out where to input.

The more I know the more I don’t know.

S

SJCASHAuthor

Level 2

They did pay foreign tax on the earned income. However, I have properly not included those taxes as they related to the earned income is covered by the FEIE.

BobKamman

Level 15

It's not the Australian withholding for which you claim a credit, but the actual Australian tax. That involves completing the Australian return first, but the problem with that (after currency conversion) is that they file fiscal year returns.

Are you sure they owe Australian tax? And are you sure they owe US tax after all but the pension is excluded?

S

SJCASHAuthor

Level 2

Good point. Withholding is the payment toward but not the ultimate tax due. The fiscal year is tricky; however, there is IRS guidance available on how to properly allocate the two Australian fiscal years that fall in the US calendar tax year.

The earned income is covered by the FEIE, there are other income streams plus the pension so there is US tax liability.

I am stuck on the Form 1116 figuring the exclusion ratio at 1 for the Australian tax paid (which needs work to your point) for the General Income Category (where I categorized the pension income). Line 12, the reduction in foreign taxes on Form 1116 allocates 100% of the tax I entered to the earned income, thus excluding it.

I think I have to have this General Income Category in the wrong Lacerte field. I have it on the "Other Foreign Source Income" line under the Gross Income Within Country section on Screen 35.1

Thank you for your help.

sjrcpa

Level 15

Since "the reduction in foreign taxes on Form 1116 allocates 100% of the tax I entered to the earned income, thus excluding it. " I think you also need to enter the tax paid on the earned income to get the 1116 correct.

Alternatively, have you considered not claiming the foreign earned income exclusion and claiming the foreign tax credit for all foreign income taxed?

The more I know the more I don’t know.

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