Question

2. B a US citizen sells products in France. B’s income in France is $500,000 and B pays $200,000 in French income taxes. B’s US tax liability with respect to that income is $150,000. How much of a credit will B be able to take for the French income tax paid in the current year?

Answer 1

Foreign Tax credit :

The foreign tax credit is intended to relieve you of a double tax burden when your foreign source income is taxed by both the United States and the foreign country. In most cases, if the foreign tax rate is higher than the U.S. rate, there will be no U.S. tax on the foreign income. If the foreign tax rate is lower than the U.S. rate, U.S. tax on the foreign income will be limited to the difference between the rates. The foreign tax credit can only reduce U.S. taxes on foreign source income; it cannot reduce U.S. taxes on U.S. source income.

In the given case Income from French = $ 500,000

French taxes on such Income = $ 200,000

US tax liability on the same Income = $ 150,000

As the foreign tax rate is higher than the U.S. rate, there will be no U.S. tax on foreign income.

No tax is payable in the US on such Income. Can take the credit of 150,000 and utilize against US tax liability $150,000.