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 $240,000. 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

Kunst's foreign tax credit is limited to the U.S. tax liability on its foreign-source income. The overall limitation is calculated as (foreign-source income / worldwide taxable income) * U.S. tax liability. For the general income basket: ($100,000 / $1,200,000) * $240,000 = $20,000. For the passive income basket: ($40,000 / $1,200,000) * $240,000 = $8,000. However, the foreign taxes paid on the passive income are only $4,000, which is less than the limit, so Kunst can take a credit for the full $4,000. The total foreign tax credit Kunst can claim is $20,000 (general income basket) + $4,000 (passive income basket) = $24,000.