India capital gain (on inherited property sale) was paid on basis of indexed cost at purchase, and at 20% rate. US tax is only 15%, and based on date of inheritance.

Hence I have paid a significantly higher amount of tax in India, than the US would require. The capital gain tax paid in India was well in excess of our annual wage tax. This is causing the foreign tax credit (form 1116) to equal my entire tax bill for 2011, and we still have a small carry over for 2012. I am actually getting a refund for 2011 in federal taxes, as all wage taxes withheld is being refunded. Basically I am only paying payroll taxes on my 2011 business income.

Can anyone comment if this looks correct? Or is this impossible to happen?

Thank you

The scenario you describe is very possible, and happens rather frequently with the Foreign Tax Credit.

Thank you very much AtlantaTaxExpert.

Wiping out gains from above, is the fact that I probably have to pay 6% in Georgia state taxes. Is there any scenario in which capital gain from inherited foreign property sale would be exempt from state taxes?

Thanks again.

No, not if you were resident in Georgia at the time of sale.