Question

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 25 percent and they itemize deductions. Should they claim the foreign tax credit or a deduction for foreign taxes on their Schedule A? Why?

Answer 1

Answer:

Yes, they should claim the foreign tax credit.

Explanation:

'Martha and Lew' are taxpayers and are married.  If they claim the credit, then they will get the tax benefit on the whole amount of $400. In case they get the deduction done for foreign taxes they will have a $100 tax benefit  (given tax rate % is 25% on $400).

It is generally better to claim the credit for qualified foreign taxes in comparison to getting them deducted as an itemized deduction. If one chooses to take the 'foreign tax credit', and the taxes that have been paid  exceed the credit limit for the tax year, then the excess can be carried over to the next year.

Thus, Martha and Lew should claim the foreign tax credit.