In which situation would a taxpayer use foreign tax credits?

A taxpayer would use foreign tax credits in a situation where income is taxed by both the U.S. and a foreign country. This scenario often arises when an individual or business earns income from foreign sources and is subject to taxation in the foreign jurisdiction as well as in the U.S. The foreign tax credit allows the taxpayer to reduce their U.S. tax liability by the amount of tax paid to the foreign government, thereby mitigating the risk of double taxation.

This mechanism is critical for promoting cross-border investment and trade, as it ensures that taxpayers are not penalized for earning income abroad. The foreign tax credit effectively offsets taxes owed to the U.S. based on the amount of taxes they have already paid in the foreign country, thus helping to prevent the same income from being taxed twice.

In contrast, earning income solely within the U.S. does not involve foreign tax credits because no foreign taxes are incurred. If deductions exceed income or if the tax rate is zero, there would be no need for a foreign tax credit as these situations do not relate to foreign taxation scenarios.