1040-US: Preparing Form 1116 with Form 2555

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Question

I am preparing a Form 1116 for an activity that has foreign earned income excluded on Form 2555. I have completed the general information section and entered the form and unit number in Screen 1116. What other fields do I need to complete for Form 1116?

Answer

The tax application calculates gross income from sources within the country, expenses definitely related to that income, gross foreign source income, and the reduction in foreign taxes for activities whose form / schedule and unit number are entered in Screen 1116.

Gross income from sources within the country does not include any earned income excluded on Form 2555. The tax application calculates definitely related expenses, net of any amount allocated to any foreign earned income excluded on Form 2555. Foreign gross income calculates without regard to deductions and includes any foreign earned income excluded on Form 2555. The tax application reduces taxes paid or accrued by the taxes allocable to foreign earned income excluded on Form 2555.

In order to properly calculate Form 1116, make sure Screen 1116 is correctly associated with the appropriate taxpayer or spouse Form 2555 by entering code T or S in the T, S, J field in Screen 1116.

The Form 1116 Foreign Tax Credit Worksheet reports how the amounts calculate and is designed to be submitted with the return. To override any of the calculated amounts, enter the information in the applicable field in Screen 1116.

If filing a Form 1116 that includes capital gains or losses from foreign sources, the foreign gross income is required to be entered in the field provided.

Information regarding taxes paid or accrued, carryovers, adjustments, and boycott operations is also needed to complete the Form 1116.

Related topic: Foreign tax credits and earned income FAQs (1040)

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