How much do foreign income and foreign income tax credit impact my tax return?
My husband and I are filing our taxes jointly. Our joint domestic income is approximately $155,000. After all the deductions and credits, we are expecting to get back $2,600 in federal taxes and $800 in state taxes. My husband also had a remote contract in a foreign country, and he made roughly $17,000 in gross foreign income. He paid $2,600 in foreign taxes. This work was done while being in the US, not abroad.
We have been using a tax calculation software to prepare our taxes. When we entered our foreign income, and completed the form for foreign tax credit, it looks like we now owe $800 in federal and state taxes. Does this seem correct? We already paid the taxes on the foreign income. After inputting the foreign tax credit, we are going from receiving $3,400 in state and federal taxes to owing $800. Is it possible we filled out Form 1116 for Foreign Tax credit incorrectly?
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There is definitely a chance you filled out the tax form incorrectly. Even when using software, the chances for error are extremely high. While it is possible the foreign income could have caused a swing, it seems unlikely to be that dramatic based on the amount of foreign income you earned. The tax credit should have taken care of the foreign income taxes owed. This is an area where you should definitely have a CPA and possibly a financial planner in your corner.
At your income, it is likely having a CPA will pay more in tax savings than the cost. Find a CPA with experience working with overseas income and the foreign income tax credit. Additionally, a comprehensive financial planner could identify other ways to save on taxes going forward. (CPAs are historians by nature, while planners look forward. So the CPA minimizes taxes from last year, while a good planner should help with the future years).
While saving money by doing things yourself is often a good idea, most people don't have the expertise to get the most out of things like taxes and investing. A professional will pay for their fee many times over, if they are good at their job.