I am a citizen of a country(India) with which US has a tax treaty(http://www.irs.gov/businesses/international/article/0, id=169600,00.html) where I worked from Jan 1, 2009 to Aug 10, 2009. From Aug 21, 2009 to Dec 31, 2009 I was working in U.S. on a non-immigrant visa. For tax purposes, I am U.S resident alien since I was in U.S for some time in 2008 and complete 2007. The income I earned in my country(of which I am a citizen) was 6K $ and there was additional 1K $ in unearned income(interest from savings account and mutual fund dividends). The income earned in U.S. for 4 months was around 20K.

I used TurboTax Freedom edition(which is free) for filing taxes as I live in Florida where there is no state tax. But, on line 21 of Form 1040 under other income my foreign earned + unearned income is shown as negative -7K and the explanation is Form 2555, which reduces the total taxable income for year 2009 to 20K - 7K = 13K.

1. Is this correct(the way my total taxes are reduced due to the 7K earned in foreign country) or am I or TurboTax erring somewhere? I understand you can take a foreign income exclusion of up to 91,400 $. Is that what is bringing the total to negative 7K.

Any advice would be appreciated.

Provide exact dates of your arrival and departure in and out of U.S. in 2007, 2008 and 2009.

Provide exact dates of your arrival and departure in and out of U.S. in 2007, 2008 and 2009.

Was present in U.S. for entire 2007.
Left U.S. on Feb 11, 2008
Entered U.S on Aug 20, 2009 and left on 12/19/2009

Was in India only from Feb 13, 2008 till Aug 19, 2009

So, 1/6 of days present in U.S in 2007 year = 60
1/3 of days present in U.S in 2008 = 42/3 = 14
days in U.S. in 2009 = 120

The sum of three is more than 183 so by substantial presence test I am resident alien for tax purposes.

On Line 7 of Form 1040, you show the $20K in U.S.-sourced plus the $6K in foreign earned income.

On Line 8, you show the $1,000 in foreign interest.

Form 2555 is used to EXCLUDE foreign EARNED income from your tax return, so the $6,000 in earned income should be excluded as shown as a NEGATICE amount on Line #21.

However, the interest is NOT earned income, so it is NOT excluded on Form 2555. You CAN claim the Foreign Tax Credit (Form 1116) for any foreign taxes paid on that interest.