Question

Foreign Tax Credit (LO 7.6)

Martha and Lew are married taxpayers with $400 of foreign tax withholding from dividends in a mutual fund. They have enough foreign income from the mutual fund to claim the full $400 as a foreign tax credit. Their tax bracket is 24 percent and they itemize deductions. Should they claim the foreign tax credit or a deduction for foreign taxes on their Schedule A?

The foreign tax deduction will result in a $ tax benefit where as claiming the foreign tax credit yields a $400 tax benefit. Therefore, the taxpayers should claim the foreign tax credit.

Answer 1

Answer

Lew and Martha claim the credit. Lew and Martha deduct tax than Lew and Martha have a $96 as tax benefit

($400 deduction * 24% tax rate).

If Lew and Martha claim the $400 credit than Lew and Martha will have a full tax benefit of $400.

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