The following information pertains to Raubolt Corporation’s
operations for the current year:

Worldwide taxable income $300,000

US source taxable income 180,000

US income tax before foreign tax credit 96,000

General category income 90,000

Foreign income tax paid on general category income 32,000

Foreign passive category income 30,000

Foreign income tax paid on passive category income 7,500

What amount of foreign tax credit may Raubolt Corporation
claim for the current year?

(b) The requirement is to determine the amount of
foreign tax credit that Raubolt Corporation may claim for the
current year. Since US taxpayers are subject to US income tax on
their worldwide income, they are allowed a credit for the income
taxes paid to foreign countries. However, the amount of credit
that can be currently used cannot exceed the amount of US tax
that is attributable to the foreign income. This foreign tax credit
limitation can be expressed as follows:
Foreign TI
� (US tax) = Foreign tax credit limitation
Worldwide TI
One limitation must be computed for foreign passive category
income (e.g., interest, dividends, royalties, rents, annuities), with
a separate limitation computed for foreign general category income.
In this case, the foreign income taxes paid on passive category
income of $7,500 is fully usable as a credit because it is less
than the applicable limitation amount of ($30,000/$300,000) x
$96,000 = $9,600 (i.e., the amount of US tax attributable to the
income).
On the other hand, the credit for the $32,000 of foreign income
taxes paid on general category income is limited to the
amount of US tax attributable to the foreign general category
income of ($90,000/$300,000) x $96,000 = $28,800. Thus,
Raubolt’s foreign tax credit for the current year totals $28,800 +
$7,500 = $36,300.