Sarah, a married taxpayer who files a joint return, is considering a foreign assignment for two years. In 2015, she will earn $120,000 in the foreign country. Sarah has no other income. She will be eligible for either the foreign tax credit or the foreign-earned income exclusion. The average tax rate on Sarah’s earnings if fully taxable under U.S. law would be 30%. The average tax rate for the foreign salary is 20% under the foreign country’s laws.
a. Discuss in general terms the computation of the foreign tax credit and its limitation.
b. Would Sarah be better off electing the foreign tax credit or the foreign earned income exclusion? Explain.