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 25%. 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

Question

Quizplus · Accepted Answer

The foreign tax credit is limited to the amount of U.S. tax that would be paid on the same income. Therefore, the maximum foreign tax credit that Karen can claim is the amount of foreign tax she paid on her wages earned from Country A, which is $8,000. She does not have any tax liability on her interest income from Country B, so she cannot claim a foreign tax credit for that income.