Suppose you are a citizen of the United States with foreign-source income. In the foreign country the tax rate is 40 percent and your U.S. rate is 30%. For every $10,000 of foreign-source income you will

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The foreign tax credit is calculated by taking the foreign tax liability on the foreign-source income and multiplying it by the ratio of the foreign-source income to worldwide income. In this case, the foreign tax liability is 40% and the ratio of foreign-source income to worldwide income is 100%. Therefore, for every $10,000 of foreign-source income, the foreign tax credit would be $4,000. However, the maximum foreign tax credit you can claim is limited to the amount of U.S. tax liability on the foreign-source income. In this case, the U.S. tax liability is 30%, so the maximum foreign tax credit you can claim is $3,000, which is answer A.

Suppose You Are a Citizen of the United States with Foreign-Source