The Federal Tax Credits Blog

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Question: Foreign tax- deductible or credit?

I have incomes this year from the US and New Zealand. Are taxes paid to New Zealand a deduction on my taxable US income, or are they a tax credit which reduce my US taxes by $1 for every dollar I paid in NZ tax?

As a follow up, NZ taxes are higher than US taxes, so I should owe the US nothing for my already taxed NZ income. correct?
My NZ income was only 23% of my total income. THe rest was from the states.

Answer: If the NZ income is 80% of your worldwide income, then the NZ taxes paid can be used as credit for no more than 80% of your US tax bill. The form 1116 works on averages, so you can’t simply think, if I’d only made $xxx in the US, I’d pay Y. The tax on the US income is prorated across all of your tax brackets.

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Question: What will my tax liability be?

I expect to make about 20,000 by the end of this year. I have claimed single, 2 allowances. I have no dependants. I cannot be claimed as dependent either. I have only had $170 withheld in federal taxes so far, but I am worried that I may owe(thats the IRS withholding calculator says, it says i will owe 460, because my tax bill will be 783). I exempt the last paycheck and my bonus check(they come together at one time) because alot of taxes can take almost the entire check( i need that money.)
Last year, I owed $11, but that wasnt so bad. I only made around 6000 that year.

I am wondering if the Making Work Pay credit(i think it will $400 for me) will help me. Also, can I get the standard deduction($5700) and the personal exemption(like $3000 something) at the same time?

I was just wondering if any one could let me know what my actual tax liability would be after the deduction and exemptions(if any) are applied. I am 19 years old.

thanks so much!!!

Answer: You can’t file as exempt for a bonus check unless your employer breaks the law. There is a mandatory withholding rate for all irregular wages such as commissions and bonuses. The rate is 25% on cumulative payments up to $1,000,000 in a year and 35% on amounts over that. It’s nearly impossible for taxes to take most of a bonus check. The highest state tax rate is 11% (Hawaii, but in New York City the combined state and city rate tops out at a little over 12%). Social Security is 6.2%, Medicare is 1.45%. That makes the highest possible tax withholding percentage would be less than 44%.

The standard deduction ($5,700 in 2010) and the personal exemption ($3,650) are not related to each other.

An income of $20,000 would create a federal tax liability of $1,179. You would get the Making Work Pay credit of $400 so your total liability with the tax return would be $607.

I used the calculator at KJE Computer solutions for my calculation. http://www.dinkytown.net/java/Tax1040.html

I hope this helps.
Gary

Shell at MIT’s Technology Review EmTech 2010