Question

Tina worked in Norway for two months in the current tax year. She earned $80,000 exclusively in the United States and $20,000 exclusively in Norway. Tina had to pay $8,000 in income taxes to Norway. Before considering the Foreign Tax Credit, Tina’s federal return is showing a tax liability of $16,000. She calculates that $7,000 of this federal tax is specifically related to the income earned in Norway. What is Tina’s Foreign Tax Credit?

Answer 1

Tina's foreign tax credit cannot be more than her total U.S. tax liability multiplied by a fraction. The numerator of the fraction is her taxable income from sources outside the United States. The denominator is her total taxable income from U.S. and foreign sources. Certain tax filers are exempt from these limits. That includes people whose foreign tax obligation is no more than $300 ($600 for joint filers) and whose only foreign source of income is deemed passive income.

U.S. Source Income = $80,000

Foreign Source Income = $20,000 (Norway)

Total Taxable Income = $1,00,000 ($80,000 + $20,000)

The Maximum Foreign Tax Credit that Tina can obtain = $16,000 X ($20,000 / $1,00,000) = $3,200.

If you have foreign taxes available for credit but you cannot use them because of the foreign tax credit limit, you may be able to carry them back to the previous tax year and forward to the next 10 tax years.