Mr.French had the following income and taxes: Calculate the amount of the foreign tax credit.

Question

Mr.French had the following income and taxes:  Calculate the amount of the foreign tax credit.

Quizplus · Accepted Answer

The foreign tax credit is calculated as the lesser of the foreign taxes paid or the US tax liability on the income earned from foreign sources. From the given income and taxes, we can calculate the US tax liability on foreign income as follows:

Foreign income = $30,000
Foreign taxes paid = $6,000
US tax liability on foreign income = (Foreign income / Total income) x Total tax liability
= (30,000 / 80,000) x 20,000
= $7,500

Since the foreign taxes paid ($6,000) are less than the US tax liability on foreign income ($7,500), the foreign tax credit will be equal to the foreign taxes paid, which is $6,000. However, since $6,000 exceeds the foreign tax credit limit of $3,000 for the current year, the maximum foreign tax credit allowable for the year is $3,000. Therefore, the answer is C, with a foreign tax credit of $3,000.

MrFrench Had the Following Income and Taxes: Calculate the Amount