Patty,a single taxpayer,has $100,000 of U.S.source taxable income and $300,000 of foreign source taxable income from countries X and Y for a total worldwide taxable income of $400,000.Countries X and Y levy a total of $89,000 in foreign taxes upon the foreign source taxable income.U.S.taxes before credits are $115,194.The foreign tax credit limitation is
A)$28,799.
B)$86,396.
C)$66,750.
D)$89,000.

Question

Quizplus · Accepted Answer

To calculate the foreign tax credit limitation, we use the following formula:
Foreign tax credit limitation = U.S. tax before credits x (total foreign source taxable income / total worldwide taxable income)
In Patty's case, the foreign tax credit limitation is:
$115,194 x ($300,000 / $400,000) = $86,396

The foreign tax credit limitation is the maximum amount of foreign tax credits that Patty can claim on her U.S. tax return. Since the total foreign taxes paid ($89,000) are less than the foreign tax credit limitation ($86,396), she can claim the entire amount of foreign taxes as a credit on her U.S. tax return. Therefore, choice B is the correct answer.

Patty,a Single Taxpayer,has $100,000 of U