Stephen R. and Rachel K. Bates, both U.S. citizens, resided in Country K for the entire current year except when Stephen was temporarily assigned to his employer’s home office in the United States. They file a joint return and use the calendar year as their tax year. The Bateses report the following current-year income and expense items:
Salary and allowances: United States …………………………………………………………………$ 20,000
Country K ……………………………………………………………………………………………………………150,000
Dividends: From U.S. ……………………………………………………………………………2,000
From Country K …………………………………………………………………………………15,000
Unreimbursed foreign business expenses (directly allocable to Country
K earned income and deductible as a miscellaneous itemized
deduction)
………………………………………………………………………………………………………………………………..5,000
Charitable contributions paid to U.S. charities (not directly allocable to
any income item)
…………………………………………………………………………………………………………………………………8,000
Country K income taxes paid on April 1 of current year (in dollars) …………………………12,500
Personal and dependency exemptions …………………………………………………………………………..2
Last year, the Bateses elected to accrue their foreign income taxes for foreign tax credit purposes. No foreign tax credit carryovers to the current year are available. Stephen Bates estimates the family will owe 75,000 tesos in Country K income taxes for this year on the Country K salary and dividends. The average annual for the current year is 4 tesos to $1 (U.S.). The teso-U.S. dollar did not change between year-end and the date the Bates paid their Country K taxes. No Country K taxes were withheld on the foreign dividend.
Complete the two Form 1116s the Bateses must file with their income tax return to claim a credit for the foreign taxes paid on the salary and dividends. Use 2016 tax forms and ignore the implications of the Sec. 911 earned income exclusion, itemized deduction and personal exemption phase-outs, and alternative minimum tax provisions.
