Karen, a U.S. citizen, earns $40,000 of taxable income from U.S. sources, $20,000 in taxable wages from Country A and $20,000 in taxable interest from Country B. The U.S. tax rate is 21%. The tax on Country A income is $8,000, and Country B charges no tax on the interest income. Assuming only a single basket is required, Karen's foreign tax credit that can be claimed is

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The foreign tax credit is calculated by taking the lesser of the foreign tax paid or the U.S. tax that would have been due on that income and applying it as a credit towards the U.S. tax liability. In this case, Karen's U.S. tax liability on $40,000 of taxable income is $8,400 (21% of $40,000). Since the tax on Country A income is $8,000, that is the lesser of the two amounts and can be claimed as a foreign tax credit. The tax on Country B income is not relevant since there was no tax paid to that country. Therefore, Karen's foreign tax credit is $8,000.