Alan, a U.S. citizen, works in Germany and earns $70,000, paying $20,000 in German taxes. His U.S. income is $40,000 and he pays $8,000 in U.S. taxes. His U.S. taxes on his worldwide income are $22,500. What is Alan's foreign tax credit? Assume he does not qualify for the foreign-earned income exclusion.
A)$12,000
B)$14,318
C)$20,000
D)none of the above

Question

Quizplus · Accepted Answer

Alan's foreign tax credit is calculated as the lesser of the foreign taxes paid or the U.S. taxes on the foreign income. In this case, Alan's foreign taxes paid are $20,000 and his U.S. taxes on his foreign income of $70,000 are $22,500. So, the foreign tax credit is $20,000. However, since Alan also paid $8,000 in U.S. taxes on his U.S. income of $40,000, his total U.S. tax liability is $30,500. Since his foreign tax credit is only $20,000, he still owes the remaining U.S. taxes of $10,500.

Alan, a US