Tax Lesson 38 - Foreign Tax Credit for Individuals

Tax School Homepage

Student Instructions:

Print this page, work on the questions and then submit test by mailing the answer sheet or by completing quiz online.

Instructions to submit quiz online successfully: Step-by-Step check list

Answer Sheet            Quiz Online

Most forms are in Adobe Acrobat PDF format. You will need Adobe Reader to view and print these forms. If you do not already have Adobe Reader installed on your computer, you may download the software for free.

Complete a tax return:

You will need IRS Publication 514 to complete this seminar.

Prepare a Federal Form 1040, Schedule A & B and Form 1116 if needed.

In 2008, Jeanette Fillmore, is a single woman and a U.S. resident. 

She received investment income of $8,000 from Belgium whom imposed a tax of $3,750 on that income because she did not meet the residency requirements for a lower tax in that country.

Other than the $3,750 of foreign tax that she paid, she has various itemized deductions. They are the following:

Jeanette has no other deductions. Prepare her tax return allowing her the best advantage for her.

Her current address shows in the following Form W-2.

Please answer the following as accurately as possible.

1. Look at the Form 1040 you prepared for Jeanette Fillmore. What is the amount on Form 1040, Line 56?

A. $ 0.
B. $ 1,201.
C. $ 8,749. 
D. $ 19,409.

2. Look at the Form 1040 you prepared for Jeanette Fillmore. What is the amount on Form 1040, Line 75?

A. $ 0.
B. $ 843.
C. $ 1,107. 
D. $ 494.

3. To choose the foreign tax credit, you generally must complete Form 1116 and attach it to your U.S. tax return. However, you may qualify for the exception that allows you to claim the foreign tax credit without using Form 1116. You will be able to claim the foreign tax credit without using Form 1116 if

A. Your only foreign source gross income for the tax year is passive category income including high taxed income and export financing interest.
B. Your qualified taxes for the tax year are not more than $300 ($600 if married filing jointly).
C. All of your gross foreign income and the foreign taxes are reported to you on a payee statement and you elect to not use Form 1116 for the tax year.
D. All of the above.

4. If you elect and qualify to claim the foreign tax credit without using Form 1116, enter it directly on

A. Form 1040, line 21, or 1040NR line 12.
B. Form 1040, line 47, or Form 1040NR, line 44.
C. Form 1116, line 29 or Form 1116NR, line 31.
D. Form 1040, line 46 or Form 1040NR line 48.

5. This credit is intended to relieve you of the double tax burden when your foreign source income is taxed by both the United States and the foreign country.

A. Alternative minimum tax.
B. Work opportunity credit.
C. Foreign Tax Credit.
D. Prior minimum tax credit.

6. You can claim the credit for a qualified foreign tax in the year in which you pay it or accrue it, depending on the method of accounting used. If you use the accrual method of accounting, you can choose to take the credit

A. In the year you pay the tax.
B. In the year you pay the tax or the year you accrue it.
C. Only in the year in which you accrue the tax.
D. Any of the above.

7. The following taxes qualify as taxes for the foreign tax credit.

A. Foreign real estate taxes.
B. Foreign personal property taxes.
C. Taxes on foreign oil related income.
D. None of the above.

8. If you choose to deduct qualify qualify foreign taxes, you

A. Must deduct all of them.
B. Must take a credit for all of them.
C. You can take a credit for part of it and deduct the rest.
D. Must figure your tax both ways and claim both the credit and the deduction.

9. Harry paid foreign taxes for the last 15 years and chose to deduct them on his U.S. income tax returns. He was timely in both his filing his tax returns and paying his U.S. tax liability. In March 2008, he amended his tax return for tax year 1995 choosing to take a credit for his 1995 foreign taxes because he now realizes that the credit is more advantageous than the deduction for the year.

A. Because the regular due date of the 1995 tax return was April 15, 1995, this choice is timely.
B. Because the regular due date of the 1995 tax return was April 15, 1995, this choice is not possible.
C. Because the regular due date of your 1997 return was April 15, 1998, this choice is timely (within 10 years).
D. None of the above.

10. Generally, it is better to take a credit for qualified foreign taxes than to deduct them as an itemized deduction.

True False

11. The reason it is generally better to take the foreign tax credit for qualified foreign taxes than to deduct them as an itemized deduction is because

A. A credit reduces your actual U.S. income tax on a dollar-for-dollar basis, while a deduction reduces only your income subject to tax.
B. You can choose to take the foreign tax credit even if you do not itemized your deductions. You then are allowed the standard deduction in addition to the credit.
C. If you choose to take the foreign tax credit, and the taxes paid or accrued exceed the credit limit for the tax year, you may be able to carry over or carry back the excess to another tax year.
D. Any of the above.

12. If you paid or accrued foreign taxes to a foreign country on foreign source income and are subject to U.S. tax on the same income, you may be able to take those taxes. The following is a true statement regarding the foreign tax credit.

A. If you have an unused foreign tax that you are carrying back to the first preceding tax year, you should file Form 1040X for that year and attach a revised Form 1116.
B. If you are U.S. citizen, you are not taxed by the United States on income earned in a foreign country.
C. If you are a resident of the United States, you can take a credit for foreign taxes subject to the same general rules as U.S. citizens unless you are a bono fide resident of Puerto Rico.
D. You have 3 years to file a claim for refund of U.S. tax if you find that you paid or accrued a larger foreign tax than you claimed a credit for.

13. If you claim the credit for foreign taxes on an accrual basis, you must generally use the average exchange rate for the tax year to which the taxes relate.

True False

14. If your foreign tax refund is taxed by the foreign country, you can take a separate credit or deduction for this additional foreign tax.

True False

15. You have 10 years to file your claim regardless of whether you claim the credit for taxes paid or taxes accrued. The 10-year period applies to claims for refund or credit based on

A. Fixing math errors in figuring qualified foreign taxes.
B. Report qualified foreign taxes not originally reported on the return.
C. Any change in the size of the credit (including one caused by correcting the foreign tax credit limit).
D. Any of the above.

16. Simply because the levy is called an income tax by the foreign taxing authority does not make it an income tax for foreign tax credit purpose. A foreign levy is an income tax if

A. It is a tax that you have to pay and you get no specific economic benefit from paying it.
B. The predominant character of the tax is that of an income tax in the U.S. sense.
C. The foreign levy is allowed if the foreign tax law is the same as U.S. tax law and must include items that the U.S. law includes as income.
D. Both A and B above.

17. The United States is a party to tax treaties that are designed, in part, to prevent double taxation of the same income by the United States and the treaty country.

True False

18. In a given year, you must either claim a credit for all foreign taxes that qualify for the credit or claim a deduction for all of them. This rule is applied with the carryback and carryover as follows

A. You cannot claim a credit carryback or carryover from a year in which you deducted qualified foreign taxes.
B. You cannot deduct unused foreign taxes in any year to which you carry them, even if you deduct qualified foreign taxes actually paid in that year.
C. You cannot claim a credit for unused foreign taxes in a year to which you carry them unless you also claim a credit for foreign taxes actually paid or accrued.
D. All of the above.

19. You may have to allocate an unused foreign tax or excess limit for a tax year in which you and your spouse filed a joint return. This allocation is needed if

A. You and your spouse file separate returns for the current tax year, to which you carry an unused foreign tax from a tax year for which you and your spouse filed a joint return.
B. You and your spouse file separate returns for the current tax year, to which you carry an unused foreign tax from a tax year for which you and your spouse filed separate returns, but through a tax year for which you and your spouse filed a joint return.
C. You and your spouse file a joint return for the current tax year, to which you carry an unused foreign tax from a tax year for which your and your spouse filed a joint return, but through a tax year for which you and your spouse filed separate returns.
D. Any of the above.

20. You can deduct any foreign tax that is not allowed as a credit if you participated in or cooperated with an international boycott or you paid taxes in connection with the purchase or sale of oil or gas.

True False