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Form 1116 - FEIE and IRA distribution, other ordinary income

JWM
Level 3

Taxpayer is reporting both excluded earned income and other ordinary income, including regular IRA distributions and other ordinary income reported to him by brokerage account on a 1099-MISC. All three have been taxed by tax authority of foreign country of residence. Proseries does not seem to allow a tax credit against the IRA distribution and 1099-MISC income, treating it all as excluded income. This seems incorrect to me. And it does not appear you can create separate 1116 general category sheets to separate these two types of general category income, either. Am I misapplying tax law here, is Pro series not processing this right, is there a practical solution? If I am correct then this is a serious error in Pro Series.

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8 Comments 8
Terry53029
Level 15
Level 15

Is your client paying tax on the IRA both foreign, and U.S.

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JWM
Level 3

Yes, resident foreign country taxes both his local wages and his IRA distribution (and 1099-MISC other income reported on a U.S. brokerage statement) as a resident of the country. (The country provides a FTC for income tax withheld at (US) source up to 15%, none withheld in this case but not relevant to my question anyway.) Taxpayer chooses to exclude foreign earned income on his 1040, and Pro Series does not seem to allow for a calculation of foreign credit for the IRA (general category, ordinary income ...) or 1099-MISC separate from the earned income. I'm pretty confident that he should be allowed a credit for the non-earned, general category income, but I do not see how this is possible on Pro Series 1116 without executing a number of overrides ... So either 1) I do not know how to activate this functionality in the form, 2)  the form just does not do it and Intuit has never found this important enough to enable and I will need to execute the overides, or 3) I am mistaken and the taxpayer is in fact not allowed a credit on his non-earned general category income if he claims the FEIE..

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Terry53029
Level 15
Level 15

I don't believe an IRA is considered earned income for the foreign earned income exclusion. An IRA is a tax favored savings account not earned income. You can take a tax credit on the 1116 for the IRA that was taxed by U.S. and his home country (depending if there is a tax treaty involved) When filling out the 1116 you need to quick zoom to the worksheet at top of 1116 for data entry, as you can't enter directly on the 1116

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JWM
Level 3

This is my point. If I enter the IRA distribution or other ordinary income to the 1116 worksheet, if the 2555 Income worksheet is populated and FEI < max exclusion, it automatically reduces tax available for credit to zero. I do not want to believe that the correct solution is to manually override the foreign tax reduction calculation ...

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Terry53029
Level 15
Level 15

Note the credit cannot be more than the U.S. tax liability. If not allowed it will be carried over to 2025. The 1116 has worked for the couple I did this year with no overrides. Note you can't take the exclusion, and the credit on the same income

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JWM
Level 3

This is not the issue. Assume taxpayer receives a 40,000 distribution from IRA, no tax withheld by US institution, and 60,000 in foreign wages from foreign employment. If you enter for 60,000 in excluded wages(=0)  and 40,000 in IRA distributions for lets says 20,000 in tax, theoretically, 60000/100000 = 60% x 20,000 in foreign tax would be reduced to zero, leaving 40% x 20,000 = 8,000 of tax available to cover the IRA liability. But PS 1116 reduces all 20,000 in foreign tax to 0. Try it. This seems incorrect to me. What do you think?

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Terry53029
Level 15
Level 15

I've not had a client with both exclusion, and credit, so I am not sure ProSeries is wrong. maybe someone else will jump in. I did notice when doing the 1116 and the exclusion to be sure and fill out the 2255 allocation worksheet

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JWM
Level 3

1116 general category seems to be hard-coded to assume all general category income reported is foreign earned income. The 2555 allocation worksheet is merely a tool for determining how much of foreign earned income is not excluded. I can identify no tool that allows me to allocate tax between earned and other non-earned ordinary income.

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