Taxes: Taxation & Foreign Income

Question 1

Taxes:
Taxation & Foreign Income
General

Answer 1

General

• Treaties trump tax law
• Foreign taxpayers taxed only on US sourced income
• US Taxpayers taxed on all income
• if foreign corp receives more than 25% US Sourced income for previous 3 years, it is US sourced

Question 2

Taxes:
Taxation & Foreign Income
Outbound Transactions

Answer 2

Outbound Transactions

• transfer of assets may trigger income
• if used in trade/business outside US gain is deferred unless inventory, installment obligations, or foreign currency

Question 3

Taxes:
Taxation & Foreign Income
Controlled Foreign Corporation

Answer 3

Controlled Foreign Corporation
- more than 50% voting power or value of stock is owned by US citizens
Constructive Dividends:
- income not connected economically to the country where incorporated
- income from insuring risk of loss from outside the country in which organized

Question 4

Taxes:
Taxation & Foreign Income
Worldwide Income

Answer 4

Worldwide Income
Mitigate Double Taxation
- Itemized deduction for foreign income tax paid
- or credit ( limited if US rate is greater)
- some can exclude
Limit
= (US Tax on worldwide income X Foreign Source)/ Worldwide taxable income
- must add personal exemptions to worldwide income
- back 1 and forward 10
- only passive income less than $300k are exempt
- foreign tax credit is usually better
Tests
- bona fide resident of at least 1 foreign country
- have a tax home and be present for 330+ days in 12 months