Foreign Exclusion - I don't understand

I'm trying to do my taxes on Turbotax and I must say I'm extremely confused.

I moved to the UK on April 16th (so 260 days in 2011), but from what I've gathered I can only exclude the taxes I've paid if I was here for more than 330 days.

I've paid taxes on my income in the UK this year, so why can't I exclude that income from my US taxes?  Or, how do I do it?

-Matt

You do have to DECLARE all income; whether you pay any US tax on that income depends on your specific situation. Personally I would forget Turbotax and go back to the old fashioned way. The standard tax preparation programs don't really work well for folks in non-standard situations. You cannot e-file with Turbotax if you have a foreign address, so there's no benefit there.

Meeting either the physical presence test OR the bona fide residence test determines whether you can take the foreign earned income exclusion, not whether you can use the tax paid to the UK to offset tax due in the US.

The physical presence test is not necessarily a calender year - in your case, look at how many days in the 12 months beginning with the day you entered the UK.

Physical Presence Test
You are considered physically present in a foreign country (or countries) if you reside in that country (or countries) for at least 330 full days in a 12-month period. You can live and work in any number of foreign countries, but you must be physically present in those countries for at least 330 full days.

12-Month Period
The qualifying period can be any consecutive 12-month period of time. You do not have to begin your qualifying period with your first day in a foreign country. You can choose a 12-month period that provides the greatest income exclusion. You can count both vacation and business days spent in the foreign country towards meeting the 330 day minimum.

You may claim a tax credit or an itemized deduction for taxes paid to foreign countries. You do not need to live or to work in that foreign country in order to claim this benefit. For example, you can claim the credit or deduction if foreign taxes were paid on your behalf from a mutual fund. There are no time requirements like there are for the income exclusions. You can claim either the deduction or the tax credit, but not both, for all foreign taxes paid.

If using the physical presence test to qualify for the foreign earned income exclusion, make sure you follow the instructions from the IRS on calculating the time period that gives you the greatest exclusion - so you may have a qualifying period of more than 260 days for 2011.

From http://www.irs.gov/publications/p54/ch04.html:

Under the physical presence test, a 12-month period can be any period of 12 consecutive months that includes 330 full days. If you qualify for the foreign earned income exclusion under the physical presence test for part of a year, it is important to carefully choose the 12-month period that will allow the maximum exclusion for that year.

Example.

You are physically present and have your tax home in a foreign country for a 16-month period from June 1, 2010, through September 30, 2011, except for 16 days in December 2010 when you were on vacation in the United States. You figure the maximum exclusion for 2010 as follows.

    Beginning with June 1, 2010, count forward 330 full days. Do not count the 16 days you spent in the United States. The 330th day, May 12, 2011, is the last day of a 12-month period.

    Count backward 12 months from May 11, 2011, to find the first day of this 12-month period, May 12, 2010. This 12-month period runs from May 12, 2010, through May 11, 2011.

    Count the total days during 2010 that fall within this 12-month period. This is 234 days (May 12, 2010 – December 31, 2010).

    Multiply $91,500 (the maximum exclusion for 2010) by the fraction 234/365 to find your maximum exclusion for 2010 ($58,660).

You figure the maximum exclusion for 2011 in the opposite manner.

    Beginning with your last full day, September 30, 2011, count backward 330 full days. Do not count the 16 days you spent in the United States. That day, October 19, 2010, is the first day of a 12-month period.

    Count forward 12 months from October 19, 2010, to find the last day of this 12-month period, October 18, 2011. This 12-month period runs from October 19, 2010, through October 18, 2011.

    Count the total days during 2011 that fall within this 12-month period. This is 291 days (January 1, 2011 – October 18, 2011).

    Multiply $92,900, the maximum limit, by the fraction 291/365 to find your maximum exclusion for 2011 ($74,065).

If you do not yet qualify for the FEIE then you can use foreign tax credits (Form 1116) to avoid being double taxed. Form 1116 is complicated but I was eventually able to work it out on my own.