Max paid $2,500 in foreign income taxes to Peru.His total income was $65,000,which included $9,000 of foreign income.His U.S.tax liability is $17,750.How much can Max claim as foreign tax credit? (Do not round interim calculations. )

Question

Quizplus · Accepted Answer

To calculate the foreign tax credit, Max must first determine his taxable income. His total income was $65,000, and he can exclude up to $105,900 of foreign earnings from U.S. taxation. Therefore, Max's taxable income is $65,000 - $105,900 = -$40,900, which means he has no U.S. tax liability on his foreign income.

However, Max can still claim a foreign tax credit for the $2,500 he paid in foreign income taxes to Peru. The foreign tax credit is calculated by multiplying the foreign tax paid by the ratio of Max's foreign income to his total income. In this case, Max's foreign income was $9,000 and his total income was $65,000, so the ratio is 9,000/65,000 = 0.1385.

Therefore, Max's foreign tax credit is $2,500 * 0.1385 = $346.25. However, there is a limitation on the foreign tax credit, which is the lesser of the foreign tax paid or the U.S. tax liability on the foreign income. In this case, Max's U.S. tax liability on his foreign income is $0, so the foreign tax credit is limited to the amount of foreign tax paid, which is $2,500. However, Max can carry forward any excess foreign tax credits to future tax years.

So, the correct answer is A) $2,458.

Max Paid $2,500 in Foreign Income Taxes to Peru