Sheila and Jerry are married taxpayers with 600 of foreign t

Sheila and Jerry are married taxpayers with $600 of foreign tax withholding from the dividends in a mutual fund. They have enough foreign income from the mutual fund to claim the full $600 as a foreign tax credit. They are in the 35% tax bracket and they itemize deductions. Should they claim the foreign tax credit on the Form 1040 or a deduction for foreign taxes on their Schedule A? Why?

Solution

Sheila and Jerry should claim foreign tax credit on the form 1040 instead of claiming itemize deduction on their schedule A. This is so because

Credit of foreign tax can be claimed on whole value of $600

Whereas deduction under schedule A can be made only on $210($600×35%). And $ 390(600-210) will be taxable