Taxpayer Q has net taxable income of $30,000 from Country Y which imposes a 40 percent income tax.In addition to the income from Country Y,taxpayer Q has net taxable income from U.S.sources of $120,000,and U.S.tax liability,before the foreign tax credit,of $41,750.What is the amount of Q's foreign tax credit?

Question

Quizplus · Accepted Answer

To calculate the foreign tax credit, we need to determine Q's foreign taxable income first.

Since Q's net taxable income from Country Y is $30,000 and Country Y imposes a 40% income tax, Q's gross income from Country Y must be $50,000 (i.e. $30,000 / 60%).

Therefore, Q's total taxable income is $170,000 ($50,000 + $120,000).

The U.S. tax liability before the foreign tax credit is $41,750.

To calculate the foreign tax credit, we need to determine the lesser of the foreign income tax paid or the U.S. tax liability on the foreign-source income.

In this case, Q's foreign income tax paid is $20,000 (i.e. $50,000 x 40%).

Comparing the foreign tax paid with the U.S. tax liability on foreign-source income, we note that $40,000 (i.e. $50,000 x 80%) of Q's total taxable income is from foreign sources.

The U.S. tax on this is $14,000 (i.e. 35% x $40,000). Since Q's U.S. tax liability before the foreign tax credit is $41,750, the foreign tax credit is $14,000 (i.e. the U.S. tax liability on foreign-source income).

Therefore, the answer is B) $8,350.

Taxpayer Q Has Net Taxable Income of $30,000 from Country