Ashley, a U.S. citizen, works in England for part of the year. She earns $40,000 in England, paying $10,000 in income taxes to the British government. Her U.S. income is $60,000 and she pays $12,000 in U.S. taxes. Her taxes on her worldwide income are $20,000. What is Ashley's foreign tax credit? Assume she does not qualify for the foreign-earned income exclusion.
A)$8,000
B)$10,000
C)$12,000
D)none of the above

Question

Quizplus · Accepted Answer

Ashley's foreign tax credit is the amount of foreign taxes paid, which is $10,000, but it is limited to the U.S. tax liability on her foreign income. Her total U.S. tax liability on her worldwide income is $20,000, and she paid $12,000 in U.S. taxes on her U.S. income. Therefore, the foreign tax credit is $20,000 - $12,000 = $8,000.