An individual works in a foreign country for the entire calendar Year 1. They earn $130,000 in salary. The maximum Foreign Earned Income Exclusion (FEIE) for Year 1 is $120,000 (hypothetical amount). They also pay $15,000 in foreign income taxes on this salary. If they elect the FEIE, which of the following statements regarding the Foreign Tax Credit (FTC) is correct?

Answer options:

They can claim the full $15,000 as a Foreign Tax Credit.

They cannot claim any Foreign Tax Credit because they elected the FEIE.

They can claim a Foreign Tax Credit only for the taxes allocable to the $10,000 of income exceeding the exclusion.

They must revoke the FEIE election to claim any Foreign Tax Credit.

How to approach this question

Remember the 'no double benefit' rule. You cannot exclude income AND claim a credit for the taxes paid on that same excluded income.

Full Answer

C.They can claim a Foreign Tax Credit only for the taxes allocable to the $10,000 of income exceeding the exclusion.✓ Correct

IRC §911(d)(6). No credit or deduction is allowed for foreign taxes paid on amounts excluded from gross income under the FEIE. Since $120,000 of the $130,000 is excluded, only the foreign tax allocable to the remaining $10,000 is eligible for the FTC.

Common mistakes

Assuming the FTC is fully available or fully unavailable.

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