Expat tax burden: what the heck changed?

We've lived in the UK continuously for nearly four years. Every year I've used TurboTax to prepare my US taxes. My wife and I file jointly and are DINKS (Dual-Income, No Kids). Neither of us makes over the excluded tax income, which I believe is $88,000 per person for 2008. Our income did not change significantly from 2007 to 2008.

For 2007 tax return, we received a sizable tax refund. Yet this year, I OWE nearly a grand!  Our tax situation has not changed much from 2007 to 2008. So what gives?  Did I miss some major tax legislation or law that increases our liability?  I fail to see why I should owe money to the IRS when I never spend a day in the United States last year. Argh! I hate the IRS.

It's $87500 for 2008. Do you have investments or interest income that has changed in that time? Because if your income is all excluded, I don't see how it changed so much either!

Negative. In fact, I had even larger deductions than usual this year because we refinanced our home in the US in 2008 so I was able to deduct the points paid.  I'm still going through it and can't figure out what I've done wrong.

I think I may have found the culprit but, for the life of me I can't figure out how to fix it. I'm using TurboTax.  On form 1116, the software has automatically DISALLOWED about 40% of the amount of the UK BRITISH taxes we paid this year, and carried them over to 2009.  I have no idea why this is the case. Why was a certain amount disallowed, and why is it being carried over?  Why cant I take the credit in full for 2008? 

No idea- sounds like a software issue. You may just have to do it the old-fashioned way!

Are you hitting a maximum allowable foreign tax credit?  Are you claiming the foreign tax credit or foreign tax deduction?

http://taxes.about.com/od/taxhelp/a/ForeignTaxCred.htm

Note I am not a tax attorney, nor do I play one on TV.

Here's your answer:

http://www.aca.ch/ftc.htm

Consider utilising the Foreign Tax Credit instead of the Foreign Earned Income Credit.


"If the tax rate of the foreign country is the same or greater than the U.S. rate (and it frequently is) the FTC will eliminate all U.S. tax due on that foreign income."

"The benefit of lowering your tax on income above the exclusion amount was eliminated in 2006...As everyone knows by now a very big change was made to the Exclusion for tax year 2006 and all subsequent years. This little article is written to show you that many times it will be to your advantage to abandon the Exclusion in favor of the more efficient and money saving Foreign Tax Credit...For those of us who work in countries where the tax rate is the same or higher than the U.S. there are [now] some serious disadvantages to employing the exclusion."

Ideas?

1. The dollar rate went to $2 so you are reporting more in any case?
2. You have overlooked filing the 8833 and claiming treaty resourcing on US income from 6 April 2008 (when UK law changed on claiming the remittance basis)
3. You failed to scale down foreign taxes in previous years on Forms 1116 - perhaps without knowing?
4. The combination of the above means you are hit worse by the stacking rule from 2007 onwards
5. Electing out of the exclusion might help - but this is rare and may cost you in the next 5 years.