Question

Jim has foreign income. He earns $26,000 from Country A which taxes the income at a 20 percent rate. He also has income from Country B of $18,000. Country B taxes the $18,000 at a 10 percent rate. His US taxable income is $90,000, which includes the foreign income. His US income tax on all sources of income before credits is $19,000. What is his foreign tax credit?

Answer 1

Answer: $7000

Explanation:

Given that,

Earns from country A (x) = $26,000

Income Tax rate in country A = 20 percent

Earns from country B (y) = $18,000

Income Tax rate in country B = 10 percent

Jim's US taxable income (I) = $90,000

His US income tax on all sources of income before credits (F) = $19,000

Foreign tax credit :

⇒ Earns from country A × Income Tax rate in country A + Earns from country B × Income Tax rate in country B

= 26,000 × 20% + 18,000 × 10%

= $7000

or

⇒ $\frac{x\ +\ y}{I\timesF}$

= $\frac{26000\ +\ 18000}{90000}\times19000$

= $9288.8

Therefore, foreign tax credit is lesser of the above, i.e $7000.