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.

Question

Quizplus · Accepted Answer

Ashley's foreign tax credit limit is the lesser of the foreign taxes paid ($10,000) or the U.S. tax on the foreign income. The U.S. tax on her foreign income is $8,000 ($40,000 foreign income / $100,000 total income * $20,000 total U.S. tax). Therefore, her excess foreign tax credit is $10,000 - $8,000 = $2,000.