Asked by Linda Rydberg on Jun 29, 2024
Verified
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. )
A) $2,458.
B) $2,500.
C) $3,350.
D) $9,000.
Foreign Tax Credit
A tax credit that cannot be refunded for income taxes paid to an external government due to withholdings from foreign income tax.
Foreign Income Taxes
Taxes paid to a foreign government for income earned outside of the taxpayer's resident country.
U.S. Tax Liability
The total amount of tax owed to the United States government, including federal, state, and local taxes.
- Differentiate the situations where foreign tax payments should be considered for itemized deductions rather than credits.
Verified Answer
However, Max can still claim a foreign tax credit for the $2,500 he paid in foreign income taxes to Peru. The foreign tax credit is calculated by multiplying the foreign tax paid by the ratio of Max's foreign income to his total income. In this case, Max's foreign income was $9,000 and his total income was $65,000, so the ratio is 9,000/65,000 = 0.1385.
Therefore, Max's foreign tax credit is $2,500 * 0.1385 = $346.25. However, there is a limitation on the foreign tax credit, which is the lesser of the foreign tax paid or the U.S. tax liability on the foreign income. In this case, Max's U.S. tax liability on his foreign income is $0, so the foreign tax credit is limited to the amount of foreign tax paid, which is $2,500. However, Max can carry forward any excess foreign tax credits to future tax years.
So, the correct answer is A) $2,458.
Learning Objectives
- Differentiate the situations where foreign tax payments should be considered for itemized deductions rather than credits.
Related questions
In Which of the Following Situations Would a Taxpayer Be ...
A Taxpayer Generally Has the Option of Deducting Foreign Taxes ...
Juliann Reported Foreign Income Tax of $1,000 on Foreign Income ...
What Is the Difference Between a Tax Credit and a ...
The Adoption Credit Is Only Available for Domestic Adoptions