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, we first need to calculate the ratio of foreign income to total income:
Foreign income/Total income = $9,000/$65,000 = 0.1385
Next, we use that ratio to calculate the foreign tax credit:
Foreign tax credit = Foreign taxes paid x Foreign income ratio
Foreign tax credit = $2,500 x 0.1385 = $346.25
However, this credit cannot exceed the U.S. tax liability on the foreign income. Therefore, the maximum foreign tax credit Max can claim is $2,458 ($17,750 x 0.1385). So the correct answer is C.

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