An individual is holding bonds issued in a foreign country. Tax of $2,000 is withheld in that country from the gross interest of $10,000. The foreign tax credit deductible from federal Tax Payable cannot exceed $1,500.

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The foreign tax credit is limited to the lesser of the amount of foreign tax paid or the amount of US tax liability attributable to the foreign income. In this scenario, the maximum foreign tax credit allowable is $1,500, which is less than the $2,000 foreign tax paid.

An Individual Is Holding Bonds Issued in a Foreign Country