chapte U.S. Tax ation of aEiR宝
1 Chapter 16: U.S. Taxation of Foreign-Related Transactions
US. TAX OF FOREIGN RELATED TRANSACTIONS Jurisdiction to tax Taxation of u.s. citizens residents Taxation of nonresidents U.S. taxation of foreign activity Foreign sales corporations
2 U.S. TAX OF FOREIGNRELATED TRANSACTIONS Jurisdiction to tax Taxation of U.S. citizens & residents Taxation of nonresidents U.S. taxation of foreign activity Foreign sales corporations
Jurisdiction to Tax Taxpayer's country of citizenship Taxpayer's country of residence Type of income earned Location where the income is earned 3
3 Jurisdiction to Tax Taxpayer’s country of citizenship Taxpayer’s country of residence Type of income earned Location where the income is earned
Taxation of u.s. citizens and residents (1 of 3) U.S. citizens and resident aliens taxed on worldwide income Income earned in foreign countries or U.s. possessions receives special treatment The foreign tax credit permits U.s taxpayers to avoid double taxation
4 Taxation of U.S. Citizens and Residents(1 of 3) U.S. citizens and resident aliens taxed on worldwide income Income earned in foreign countries or U.S. possessions receives special treatment The foreign tax credit permits U.S. taxpayers to avoid double taxation
Taxation of u.s. citizens and Residents (2 of 3) Foreign tax credit Directly reduces U.S. tax liability FTC and FEl are mutually exclusive FTC restricted for some taxpayers FTC limited to lesser of Foreign tax actually paid OR ((foreign taxable inc)/(worldwide taxable income)X(U.S tax liability 5
5 Taxation of U.S. Citizens and Residents(2 of 3) Foreign tax credit –Directly reduces U.S. tax liability –FTC and FEI are mutually exclusive –FTC restricted for some taxpayers –FTC limited to lesser of Foreign tax actually paid OR ((foreign taxable inc)/(worldwide taxable income)) x (U.S. tax liability)
Taxation of u.s. citizens and residents (3 of 3) Foreign earned income exclusion(FED) U.S. taxpayers who are bona fide residents of another country may exclude $78,000 of foreign earned income Taxpayer must be a foreign resident for 330 days of the tax year before qualifying FEI limited to lesser of >Foreign earned income for current year OR >$78,000 X of qualifying days in current year 6
6 Taxation of U.S. Citizens and Residents(3 of 3) Foreign earned income exclusion (FEI) –U.S. taxpayers who are bona fide residents of another country may exclude $78,000 of foreign earned income –Taxpayer must be a foreign resident for 330 days of the tax year before qualifying –FEI limited to lesser of »Foreign earned income for current year OR »$78,000 x # of qualifying days in current year
Taxation of nonresidents (1of5) Resident aliens are taxed same as U.S. citizens Nonresident aliens generally taxed only on U.S. source income Taxpayer is a resident alien if they meet one of the two tests
7 Taxation of Nonresidents (1 of 5) Resident aliens are taxed same as U.S. citizens Nonresident aliens generally taxed only on U.S. source income Taxpayer is a resident alien if they meet one of the two tests
Taxation of nonresidents (2of5) Resident alien tests Green-card test >)Permanent resident w/"green card visa Physical presence test >>Present 31 days during current calendar year and present 2 183 weighted average days during a three year period Current year: 1 day counted as 1 day Prior year: 1 day counted as 1/3 day 2nd prior year: 1 day counted as 1/6 day 8
8 Taxation of Nonresidents (2 of 5) Resident alien tests –Green-card test »Permanent resident w/ “green card” visa –Physical presence test »Present 31 days during current calendar year and present 183 weighted average days during a three year period • Current year: 1 day counted as 1 day • Prior year: 1 day counted as 1/3 day • 2nd prior year: 1 day counted as 1/6 day
Taxation of nonresidents (3of5) Most U.S. source passive or nvestment income is taxed Non-US trade or business(USToB) capital gains NOT taxed unless individual physically present >183 days during tax year Non-USToB interest from banks or other financial institutions not taxed 9
9 Taxation of Nonresidents (3 of 5) Most U.S. source passive or investment income is taxed Non-U.S. trade or business (USToB) capital gains NOT taxed unless individual physically present 183 days during tax year Non-USToB interest from banks or other financial institutions not taxed
Taxation of nonresidents (4of5) Portfolio interest is exempt Income from casual sale of personal property is exempt Ordinary investment income and capital gains taxed at 30% rate applied to gross income amount if physical presence test is met Individuals must itemize deductions 10
10 Taxation of Nonresidents (4 of 5) Portfolio interest is exempt Income from casual sale of personal property is exempt Ordinary investment income and capital gains taxed at 30% rate applied to gross income amount if physical presence test is met Individuals must itemize deductions