Kim, a U.S. citizen and resident, owns and operates a novelty goods business. During 2016, Kim reports taxable income of $100,000: $50,000 from foreign sources and $50,000 from U.S. sources. In calculating taxable income, the standard deduction is used. The income from foreign sources is subject to foreign income taxes of $26,000. For 2016, Kim files a joint return claiming his three children as dependents.
a. Assuming that Kim chooses to claim the foreign taxes as an income tax credit, what is his income tax liability for 2016?
b. Recently, Kim has become disenchanted with the location of his business and is considering moving his foreign operation to a different country. Based on his research, if he moves his business to his country of choice, all relevant revenues and costs would remain approximately the same, except that the income taxes payable to that country would be only $8,000. Given that all of the foreign income taxes paid are available to offset the U.S. tax liability (whether he operates in a high-tax or low-tax foreign jurisdiction), what effect will this have on his decision regarding the potential move?