ExpertMedium1 markMultiple Choice
CPA · Question 66 · Area II: Entity Tax Compliance
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?
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:
A.
$1,500
B.
$1,000
C.
$0
D.
$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
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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