Question

12- Please explain and provide examples for better understanding

Jenna paid foreign income tax of $2,015 on foreign income of $10,076. Her worldwide taxable income was $99,800, and her U.S. tax liability was $25,000.

1. What is the amount of foreign tax credit (FTC) allowed?
2. What would be the allowed FTC if Jenna had paid foreign income tax of $3,400 instead? (Do not round intermediate calculations. Round your final answer to the nearest whole dollar amount.)

	a. Foreign tax credit allowed b. Foreign tax credit allowed

Answer 1

Answer:

Foreign Tax Credit

The foreign tax credit is a tax break provided by the government to reduce the tax liability of certain taxpayers. A tax credit is applied to the amount of tax owed by the taxpayer after all deductions are made from his or her taxable income.

The total amount of the tax credit can't exceed the total of your U.S. tax obligation multiplied by a fraction. The fraction is calculated by taking your taxable income from sources outside the U.S and dividing it by your total taxable income from U.S and Other sources.

Jenna's Foreign tax is $2,015 on foreign income of $10,076 adn worldwide taxable income $99,800 and U.S Tax liability $25,000.

a) Foreign Tax Credit allowed if Foreign tax is $2,015

Foreign Tax Credit = 25,000 * (10,076/99,800)

Foreign Tax Credit = 25000 * 0.101

Foreign Tax Credit = 2524

Since Jenna has paid only $2,015, Jenna can be allowed only for $2,015 as Foreign tax Credit.

b) Foreign Tax Credit allowed if Foreign tax is $ 3,400

Since, in this case Jenna has paid a foreign tax of $3,400, Jenna is allowed to claim $2,524 as Foreign Tax Credit.