Taxation of Foreign Income

Question 1

What prevails, international treaties or US and Foreign tax law?

Answer 1

-International treaties

Question 2

When is earned income foreign source? Unearned income?

Answer 2

• If earned in a foreign country

- If received from a foreign resident or for property used in a foreign country

Question 3

In a sale of personalty, how do we determine the location source? Realty?

Answer 3

• Based on residence of seller

- Based on location of property

Question 4

What is a Controlled Foreign Corporation (CFC)?

Answer 4

-Foreign corporation where 50% of value or voting stock of corporation owned by US shareholders with 10% or more direct or indirect interest on any day of the tax year

Question 5

What are the three provisions that mitigate the potential double taxation of worldwide income?

Answer 5

• Foreign income taxes paid as an itemized deduction for individuals
• Alternatively a credit for foreign taxes paid
• Certain individuals can elect to exclude foreign earned income

Question 6

What is the limit on foreign taxes paid?

Answer 6

-Limited if US effective tax rate exceeds foreign effective rate
Limit = US tax on worldwide income x (Foreign source taxable income / Worldwide taxable income)

Question 7

What is the carryover period for excess foreign tax credits?

Answer 7

-Back 1 yr forward 10

Question 8

How are foreign currency exchange gains and losses treated?

Answer 8

• From normal course of business operations are ordinary

- From investment or personal transactions are capital