Kim, a U.S. citizen and resident, owns and operates a novelty goods business. Du
ID: 2752130 • Letter: K
Question
Kim, a U.S. citizen and resident, owns and operates a novelty goods business. During 2014, Kim has taxable income of $100,000, made up of the following: $50,000 from foreign sources and $50,000 from U.S. sources. In calculating taxable income, the standard deduction is used. The income from foreign sources is subject to foreign income taxes of $26,000. For 2014, Kim files a joint return claiming his three children as dependents. a. Assuming Kim chooses to claim the foreign taxes as an income tax credit, what is his income tax liability for 2014? b. Recently, Kim has become disenchanted with the location of his business and is considering moving his foreign operation to a different country. Based on his research, if he moves his business to his country of choice, all relevant revenues and costs would remain approximately the same except that the income taxes payable to that country would only be $8,000. Given that all of the foreign income taxes paid are available to offset the U.S. tax liability (whether he operates in a high-tax or a low-tax foreign jurisdiction), what impact will this have on his decision regarding the potential move?
Explanation / Answer
a)
Use the following values to calculate the value of the taxable income:
Taxable income is 100000.
Income from foreign sources is 50000.
Income from US sources is 50000.
Calculate the gross income as follows:
100000+50000+50000 = 200000.
Observe that standard deduction is $6200.
Therefore calculate the amount of the taxable income as follows:
Taxable income = gross income – standard deduction.
= 200000 – 6200
= 193800
Therefore the income subject to tax is $193800.
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