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When preparing a Form 1116 for an activity that has foreign earned income excluded on Form 2555, follow these guidelines.

1. In the 1116 screen, complete the general information section and enter the form and unit number.
2. Make sure the 1116 screen is associated with the appropriate taxpayer or spouse Form 2555 by entering code T or S in the T, S, J field.
3. For a Form 1116 that includes capital gains or losses from foreign sources, enter the foreign gross income.
4. Enter any information regarding taxes paid or accrued, carryovers, adjustments, and boycott operations.

Gross income calculates from the following:

• Sources within the country: This does not include any earned income excluded on Form 2555.
• Expenses definitely related to the gross income from sources within the country: This amount calculates net of any amount allocated to any foreign earned income excluded on Form 2555.
• Gross foreign source income: This calculates without regard to deductions and includes any foreign earned income excluded on Form 2555.
• Reduction in foreign taxes for activities whose form / schedule and unit number are in the 1116 screen: The taxes paid or accrued are reduced by the taxes allocable to foreign earned income excluded on Form 2555.

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.

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