During the current year, Sunny has $200,000 of U.S. source taxable income and $200,000 of foreign...

During the current year, Sunny has $200,000 of U.S. source taxable income and $200,000 of foreign source taxable income from Spain. Spain levies $40,000 in foreign taxes on the foreign source taxable income. The U.S tax before credit is $50,000 on the $400,000 of worldwide taxable income. (1) What is the maximal amount of foreign tax credit and (2) what is the treatment of the remaining credit balance, if any?(Year 2019)

Expert Solution

Sunny has a foreign income from Spain of 200,000. He can claim foreign tax credit as he is liable to pay tax in the foreign country also.

As per the IFS rules, "Your foreign tax credit cannot be more than your total U.S. tax liability multiplied by a fraction. The numerator of the fraction is your taxable income from sources outside the United States. The denominator is your total taxable income from U.S. and foreign sources."

Calculation,

The numerator here will be 200,000 (income from Spain), and the denominator is 400,000. Therefore foreign tax credit will be 50,000 x (200,000 ÷ 400,000) = 25,000.

Solution,

25,000 is the maximum foreign tax credit available
Going back to IRS rules "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." Therefore sunny can carry the remaining credit of 15,000 (40,000 - 25,000) to the future years.

ekkarill92 answered 1 year ago

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