Kunst, a U.S. corporation, generates $100,000 of foreign-source income in the general income basket and $40,000 of foreign-source income in the passive income basket. Kunst's worldwide taxable income is $1,200,000, and its U.S. tax liability before FTC is $420,000. Foreign taxes attributable to the general income basket are $60,000 and to the passive income are $4,000. What is Kunst's foreign tax credit for the tax year?

Question

Quizplus · Accepted Answer

The foreign tax credit is limited to the lesser of the foreign taxes paid or the U.S. tax on the foreign-source income. For the general income basket, the U.S. tax is ($100,000/$1,200,000) * $420,000 = $35,000. For the passive income basket, the U.S. tax is ($40,000/$1,200,000) * $420,000 = $14,000. Therefore, the foreign tax credit is $35,000 (general) + $4,000 (passive) = $39,000.