SEE-1 - Specialised Returns for Individuals (14% of the exam) - Section 6.3

Identify foreign tax credit rules, FBAR (FinCEN 114) filing requirements, and FATCA obligations for US taxpayers with foreign financial accounts or income.

Identify the FBAR (FinCEN 114) filing obligation for US persons with foreign financial accounts whose aggregate value exceeds $10,000, and distinguish it from the FATCA disclosure on Form 8938. Apply the foreign tax credit on Form 1116 to reduce double taxation on foreign-source income, and recognise the separate limitation baskets that prevent cross-crediting between passive and general income.

FBARFATCAForeign tax creditForm 1116FinCEN 114

Practice question for this objective

Free sampleSpecialised Returns for Individualshard

Soren Lindqvist, a US citizen, computes his 2024 foreign tax credit on Form 1116. His US tax before the credit is 30,000 dollars and his total taxable income is 150,000 dollars. His foreign-source taxable income falls into two separate limitation categories: 20,000 dollars of passive category income, on which he paid 8,000 dollars of foreign tax, and 40,000 dollars of general category income, on which he paid 6,000 dollars of foreign tax. The Section 904 limitation for each category equals the pre-credit US tax multiplied by that category's foreign-source taxable income divided by total taxable income, and the credit for each category is the lesser of the foreign tax paid in it or its limitation. Ignoring any carryovers, what total foreign tax credit may Soren claim for 2024?

A14,000 dollars, being the full amount of foreign income tax he paid across both the passive and the general limitation categories during 2024.
B10,000 dollars, being 4,000 dollars allowed in the passive category and the full 6,000 dollars allowed in the general category after each separate limitation. Correct
C12,000 dollars, computed by pooling both categories of foreign income into a single Section 904 limitation of 30,000 dollars times 60,000 dollars over 150,000 dollars.
D8,000 dollars, computed by applying one Section 904 limitation using only the 40,000 dollar general category income fraction and capping the whole credit there.

The Section 904 foreign tax credit limitation is computed separately for each limitation category, and the credit per category is the lesser of foreign tax paid or that category's limitation. Section 904 requires the foreign tax credit limitation to be calculated category by category rather than on a combined basis, so passive and general category income each gets its own fraction of pre-credit US tax; in the passive category the 4,000 dollar limitation caps the 8,000 dollars paid, while in the general category the 8,000 dollar limitation exceeds the 6,000 dollars paid so all of it is allowed, giving a total credit of 10,000 dollars.

Why A is wrong: This ignores the Section 904 limitation entirely and simply credits all foreign tax paid, which the per-category limitation does not permit.

Why B is correct: The passive limitation is 30,000 times 20,000 over 150,000 equals 4,000 (capping the 8,000 paid), and the general limitation is 30,000 times 40,000 over 150,000 equals 8,000 (so the 6,000 paid is fully allowed), totalling 10,000.

Why C is wrong: This combines the passive and general income into one limitation, but Section 904 requires a separate limitation to be applied to each category.

Why D is wrong: This applies a single limitation based only on the general category income and wrongly caps the entire credit, instead of running each category separately.

See more SEE-1 practice questions, answers explained.

Exam traps in Specialised Returns for Individuals

Answers that look right on this material and are not. Each one is a distractor from a different question in the SEE-1 bank for this domain.

14,000 dollars, because the full amount of foreign income tax he actually paid is creditable in the year paid.
Why it is wrong: This ignores the Section 904 limitation. The credit cannot exceed the US tax attributable to foreign-source income, so the full 14,000 dollars is not allowable in the current year.
She combines all foreign-source income and all foreign taxes into a single limitation computation covering both wages and passive income.
Why it is wrong: A single combined limitation would let high-taxed passive income soak up credits against low-taxed wages. Section 904 forbids this by requiring separate baskets, so one combined computation is wrong.
9,000 dollars, the full amount of foreign income tax he actually paid to France during the year.
Why it is wrong: This is tempting because it equals the tax paid, but the foreign tax credit is capped by the Section 904 limitation, so the full 9,000 dollars cannot all be claimed in the year it exceeds the limit.

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