Question

Wendy is a single individual works for MTP Inc. During the entire calendar year, she works in France and pays French taxes of a $1,000 on her $95,000 salary. Her taxable income without considering her salary from MTP is $10,000. Should Wendy claim the income exclusion or tax credit and how much tax does she save using the alternative selected?

Answer 1

What is year is not specified

For 2017

If Wendy claims to exclude the 95,000 salary, leaving only 10,000 of taxable income on which she will pay a US tax of 1,033.75 (tax on 9325 which is 932.5 plus 101.25 (15% (10000-9325))

If she does not claim the foreign earned income exclusion, Wendy's taxable income is $105,000 (95,000 foreign salary plus 10,000 other taxable income). The US tax on 105,000 is 22,381 (10% $0 – $9,325-932.5 Plus 15%-$9,326 – $37,950 4293.6 Plus 25% $37,951 – $91,900-13487.25 Plus 28% $91,901 – $191,650 13099*28%=3667.72)

Wendy can claim a tax credit for the 8,000 for tax paid, reducing her US tax to 14381 (22,381 - 8,000).

The income exclusion results in a tax savings of 13,347.25 (14,381 - 1033.75).

For 2018

If Wendy claims to exclude the 95,000 salary, leaving only 10,000 of taxable income on which she will pay a US tax of 1,009.50(tax on 9525-10% which is 952.5 plus 57 (12% (10000-9525))

If she does not claim the foreign earned income exclusion, Wendy's taxable income is $105,000 (95,000 foreign salary plus 10,000 other taxable income). The US tax on 105,000 is 19,488.92 (9525-10%-952.5, Plus 9526-38700-12%-3500.88 plus 38701-82500-22%-9635.78 plus 82501-157500-24%,22499*22%-5399.76)

Wendy can claim a tax credit for the 8,000 for tax paid, reducing her US tax to $11488.92(19,488.92 - 8,000).

The income exclusion results in a tax savings of $10479.42 (11488.92- 1009.50).