How may taxes paid by an individual to a foreign country be treated?

a. As an adjustment to gross income.

b. As a nondeductible expense.

c. As a credit against federal income taxes due.

d. As an itemized deduction subject to the 2% floor.

Explanation

Choice "c" is correct. A taxpayer may claim a credit against federal income taxes due for foreign income taxes paid to a foreign country or a U.S. possession. There is a limitation on the amount of the credit an individual can obtain. In lieu of this credit, an individual might find it better to deduct the taxes as an itemized deduction (NOT subject to the 2% floor) instead. Note that the only correct response to this question is choice "c"1473 however, also note that the other option for treating the taxes paid to the foreign country is not included as an answer option.

Choice "d" is incorrect. Although taxes paid by an individual to a foreign country are allowable itemized deductions, they are NOT subject to the 2% floor.

Choice "a" is incorrect. An adjustment is not allowed for taxes paid by an individual to a foreign country. A taxpayer may claim a credit against federal income taxes due for foreign income taxes paid to a foreign country or a U.S. possession. In lieu of this credit, an individual might find it better to deduct the taxes as an itemized deduction (NOT subject to the 2% floor) instead.

Choice "b" is incorrect. A taxpayer may claim a credit against federal income taxes due for foreign income taxes paid to a foreign country or a U.S. possession. In lieu of this credit, an individual might find it better to deduct the taxes as an itemized deduction (NOT subject to the 2% floor) instead.