In 2017, Henri, a U.S. citizen and calendar year taxpayer, reports $30,000 of in

Question

In 2017, Henri, a U.S. citizen and calendar year taxpayer, reports $30,000 of income from France, which imposes a 10% income tax, and $50,000 from Italy, which imposes a 40% tax. Henri's taxable income is $90,000 from within the United States. Henri is married filing a joint return, and he claims three dependency exemptions. Henri's U.S. tax before the foreign tax credit is $22,700.

Round any division to five decimal places and use in subsequent computations. Round your final answer to the nearest dollar.

Henri's foreign tax credit is

Explanation / Answer

Worldwide income = $30,000 + $50,000 + $90,000 = $170,000

Foreign income = $30,000 + $50,000 = $80,000

U.S. tax liability = $22,700

Maximum allowable foreign tax credit = U.S. tax on worldwide income x Foreign income / Worldwide income

= 22,700 x 80,000 / 170,000 = 22,700 x 0.47059 = $10,682.393 = $10,682

Thus, the maximum allowable foreign tax credit will be $10,682 provided that the foreign tax paid is not lesser than $10,682 in which case it would be the actual foreign tax paid.

Foreign tax paid (France) = $30,000 x 10% = $3,000

Foreign tax paid (Italy) = $50,000 x 40% = $20,000

Total foreign tax paid = $3,000 + $20,000 = $23,000

Henri’s foreign tax credit = $10,682

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