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 excess foreign tax credit? Assume he does not qualify for the foreign- earned income exclusion.

Question

Quizplus · Accepted Answer

Alan's foreign tax credit can only be applied up to the amount of U.S. taxes owed on his foreign income ($22,500). Since he paid $20,000 in German taxes and only owes $8,000 in U.S. taxes on that income, he has an excess foreign tax credit of $12,000. However, he cannot use all of this excess credit because his U.S. tax liability for his U.S. income ($40,000) is only $14,500 ($22,500 - $8,000). Therefore, his excess foreign tax credit is $5,682 ($14,500 - $8,818).

Alan, a US