IRS Information letter: Taxation of Green Card Holders

I'm not a tax professional, so my question could very well bed silly... Anyhow, here it goes:

If a dual-status alien has to file an income tax return both in Country X and the USA, how does the deduction for foreign taxes paid work?

Does he/she deduct Country X taxes paid from the U.S. income tax return or deduct the U.S. taxes from Country X return?

I hope this makes sense...

The US is one of the only countries which allows deduction of foreign taxes. Most countries only allow credits. (Deductions are reduction of income before taxes are calculated. Credits are reduction of taxes following the calculation.)

The rule is credit of the foreign taxes against the foreign income to the extent that the domestic return taxes that same source of income.

Example: taxpayer has a total of 100 dollars of income. Country x has 40 dollars of income and country y has 60 dollars of income. Country x taxes the 100 dollars (before credit) at 20 dollars. Country y taxes the 100 dollars 10 dollars.

Country x will allow credit of 6 dollars as country y's charged only 6 dollars on 60% of the income, while country x charges 12 dollars. The lower figure is 6.

Country y will only allow 4 dollars credit as that is the highest rate that they charged on the 40% of the income even though the taxpayer paid 8 dollars to country x.

This means that the final figures, after the foreign tax credit is country x charges 14 dollars, country y charges 6 dollars.

However, it is possible that the tax treaty will come into play and modify the rules. That was a very simple example.

Thanks for the explanation. Since an income tax return could potentially include different types of income (maybe taxed at different rates etc.), how does one determine the tax on just the $100.00 of income used in your example? Would I have to create a "mock" income tax return (for both countries and just for the $100.00 income) to determine what the tax would be?

Yes