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§ 2.21 FOREIGN TAX CREDITSthe amount of tax at the marginal rate. A 35 percent taxpayer will save 35 centsin taxes for every dollar of a deduction. A 10 percent taxpayer, by contrast, willsave only 10 cents in taxes for every dollar of a deduction. Deductions are, therefore,worth more to high-bracket taxpayers than to low-bracket taxpayers.To alter this consequence, tax credits are sometimes substituted for tax deductions.A tax credit is a dollar-for-dollar offset against income tax. Because eachdollar of credit substitutes for a dollar of tax, the tax savings is 100 percent. Further,the value of tax savings is equal for all taxpayers, regardless of marginal taxrate. Therefore, high-income taxpayers receive the same value for their tax creditsas do low-income taxpayers.The federal tax law contains an array of tax credits, such as for child care, 99adoption expenses, 100 child tax payments, 101 Hope scholarships, 102 lifetime learning,103 research activities, 104 new markets, 105 work opportunity, 106 energy, 107 andreforestation. 108§ 2.21 FOREIGN TAX CREDITSSometimes, U.S. citizens and corporations are taxed by foreign governments onincome that is also taxable by the U. S. To offset or minimize the impact of thistype of double tax burden, federal tax law provides a tax credit, subject to a limitation,109 for income taxes paid to foreign countries. 110 The limitation is designedto prevent taxpayers from using the foreign tax credits to offset or reduce U.S. taxon income from U.S. sources.The foreign tax credit limitation is computed using the overall method. 111Under this method, the maximum foreign tax credit allowed is found by dividingforeign source taxable income (FSTI) by worldwide taxable income (WTI), and multiplyingthe result by the taxpayer’s U.S. tax. Stated mathematically, the formula is:(FSTI / WTI) × U.S. tax = Maximum foreign tax creditFor example, a taxpayer has a worldwide taxable income of $100,000. Fromcountry A, taxpayer has $30,000 of taxable income. From country B, taxpayer has$20,000 of taxable income. Taxpayer’s U.S. tax is $25,000. The maximum foreigntax credit available to taxpayer is $12,500: (($30,000 + $20,000) / $100,000) ×$25,000 = $12,500.99 IRC § 21.100 IRC § 23.101 IRC § 24.102 IRC § 25A(b).103 IRC § 25A(c).104 IRC § 41.105 IRC § 45D.106 IRC § 51(a).107 IRC § 48(a).108 IRC § 48(b).109 IRC § 904.110 IRC §§ 901–908.111 IRC § 904(a). 53