A taxpayer has $5,000 of foreign source income and $95,000 of U.S. source income. Total Taxable Income = $100,000. U.S. Tax Liability = $20,000. Foreign taxes paid = $1,500. What is the Foreign Tax Credit?

Answer options:

$1,500

$1,000

$5,000

How to approach this question

FTC Limit Formula: (Foreign Income / Worldwide Income) * U.S. Tax. <br/>(5/100) * 20,000 = 1,000. <br/>Compare to actual tax paid ($1,500). Take lesser.

Full Answer

B.$1,000✓ Correct

$1,000

IRC §904. The credit is limited to the proportion of U.S. tax attributable to foreign source income. Limit = $1,000. Actual = $1,500. Credit = $1,000.

Common mistakes

Claiming the full foreign tax paid without checking the limit.

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