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.

Question

Quizplus · Accepted Answer

Ashley can claim a foreign tax credit for the $10,000 she paid in income taxes to the British government. This reduces her U.S. tax liability by $10,000, so she only has to pay $2,000 in U.S. taxes on her foreign income. Therefore, her total foreign tax credit is $8,000 ($10,000 paid to British government minus $2,000 reduction in U.S. taxes).