Foreign Income Tax Exclusion-if you qualify, do you have to use it?

Hope this doesn't sound like too stupid of a question!

Quick background-US citizen/naturalised UK citizen, British spouse, two dual children.  Had maternity leave and low-paid job last year, so income was below $15000, including some capital gains dividends.  Was planning on filing married, separately, as husband has no need to file US taxes.

I tend to use Turbo Tax to file, this year being no exception.  It does a running tally of what you owe/are owed.  I went along and it said I was going to get a refund of approximately $1700 but when I went to do the Foreign Income Tax Exclusion, which I used to always do, the refund disappeared. 

Again, hope this doesn't sound stupid, but MUST I do the exclusion? Obviously, I'd much prefer the refund to nothing!

Thanks for your help.

Not sure what you mean by Foreign Income Tax Exclusion (there is no such thing). If you mean 'Foreign Earned Income Exclusion', no, you do not have to use FEIE (form 2555). Since you are using TT, try running the programme ignoring 2555, and use 'Foreign Tax Credits' (form 1116) instead. You may find your refund reappears.

Thank you! Yes, got my acronym very wrong! I'll give what you've suggested a try (and pay attention to important details like what things are actually named!)

Since you have children that presumably you're claiming, the effect you could be seeing is from the child tax credit. When you use FEIE, that works by lowering your AGI; if you cut that down to zero that might nullify those tax credits. On the other hand, with the FTC that keeps your AGI up which means you'd still be eligible for the child tax credits (and actually getting money from the IRS, since the higher-rate UK tax offsets your US tax liability!).

Thank you both for your response.  I had a better look at my Turbo Tax return and it does appear as though the refund is due to the child tax credit.

So my next question is this (please bear with me on this!)

The past few years I filed married filing jointly, partly as I didn't know any better, if this was advantageous tax-wise and also because our joint income and the positive exchange rate meant it was better for us (I think-I didn't owe anything, so that was good.)  Some years ago, I got him a ITIN, so I have been using that for him.

Having done the sums with this refund, it looks like I might be better to do married filing separately.   My question is this:

Does my husband-UK citizen, all UK income, all of 2012 in the UK, need to actually file a return when we do married filing separately? Or do I just mark that and do my own return? 

My concern with the child tax credit was that it would be based on household income and that by not including my husband's income on my return and them him not filing, I would be witholding something (or doing something illegal!)  I also was not sure if we had done married filing jointly and used the FEIE that you somehow had to keep doing this.

Thanks again for your help.

First things first. Married filing joint:

Your husband has an ITIN and you have been filing 'married joint' for a number of years. You have made a choice to file 'joint', and the IRS now considers your husband as a 'resident' US tax payer. You can 'undo' (revoke) this, but it comes with real, hard conclusions.

http://www.irs.gov/pub/irs-pdf/p54.pdf

Go to page 7 of pub. 54. On that page is Table 1-1. If you wish to file 'married separate' from now on, read the table. You can get a divorce, but that does seem a bit extreme  If you read the 2nd paragraph just above the Table under 'Ending the choice', it makes clear that you may never, never, ever file any way but separate, ever again, as long as you are married. This could be a rather extreme step for your husband to make, given the unknowns that life can throw at you in the future.

I would suggest now that you have chosen to file 'married joint', you continue to file that way, and take the lumps.

EDIT: you still have the option to ignore 2555 and use the tax credits (1116) even when filing joint. If you do stop using 2555 after you have previously used it for a number of years, be aware of the difficulties for using it again within 5 years(? unsure of the time. Check the instructions for 2555. It's been a long, long time since I've used it).

Thank you SO MUCH for this.  Will do the married filing jointly.  It was fun to pretend that I was getting a refund for awhile. Sigh.

Final question (I hope.) I need to check but I may have inadvertantly (yes, I understand ignorance is no excuse!) filed separately last year, after many years of doing it jointly.  How do I go about rectifying this? I'm fairly certain we'd be covered by the FEIE income threshold and not owe anything.

That's for a professional to comment on. It's way beyond my (lack of) expertise.