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 U.S. taxes on her worldwide income are $20,000. What is Ashley's excess foreign tax credit? Assume she does not qualify for the foreign-earned income exclusion.
A)$0
B)$2,000
C)$4,000
D)none of the above

Question

Quizplus · Accepted Answer

Ashley's U.S. tax on her worldwide income is $20,000. She can claim a foreign tax credit for the $10,000 paid to the British government. However, the credit cannot exceed the proportion of U.S. tax attributable to her foreign income. Her foreign income is 40% of her total income ($40,000/$100,000), so the maximum credit is 40% of $20,000, which is $8,000. Since she paid $10,000 in foreign taxes, her excess foreign tax credit is $2,000 ($10,000 - $8,000).