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Introduction to Taxation Chapter 3 Taxable Entities, Tax Formula Fall 2009 Kulsrud
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Introduction to Taxation Fall, 2009 CHAPTER 3: TAXABLE ENTITIES, TAX FORMULA 1. Individuals 1.1 Citizens 1.1.1. Citizens are subject to U.S. taxes regardless of whether they live in U.S. or in a foreign country 1.1.2. Taxed on worldwide income (U.S. and foreign) a. All U.S. citizens and resident aliens are taxed by the U.S. on their income regardless of where they live or source of income b. Possible double taxation (once by foreign country and again by U.S.) mitigated by exclusion and credit or deduction for foreign taxes paid. c. Taxpayer may claim either a deduction or credit of foreign taxes paid thus generally ensuring that the taxpayer is not taxed twice 1. Foreign tax credit : a. Credit for foreign tax generally cannot exceed the amount of U.S. tax attributable to the income (lesser of foreign tax paid or U.S. tax on such income). 2. If foreign passive income (dividends, interest, etc.) is less than $300 ($600 if married joint), may elect out of complex foreign tax credit calculation and just claim credit. 2. Special treaty provisions which may mitigate double taxation also exist. d. Exclusion for earned income . “Expatriates" may exclude up to $91,400 (2009) annually of foreign earned income if meet foreign residency test. 1. Bona fide resident of foreign country 2. Physically present in foreign country 330 days in any 12 consecutive months. e. Exclusion for value of foreign housing or payments used for foreign housing. 1.2. Resident aliens 1.2.1. Defined: "foreigner" (not a U.S. citizen) that lives in U.S. is subject to U.S. tax on WORLDWIDE INCOME and files 1040 1.2.2 Examples 1.2.3. Tests: a. Legally permitted to become a permanent resident under the immigration laws (i.e., has green card) or b. Physical presence test: if here enough days in 3 year period then deemed a resident and not merely a visitor 1. At least 31 days during the calendar year and 2. Number of days present in the current year plus 1/3 of the days present in the prior year plus 1/6 of the days present in the second prior year equals at least 183 days Example Days present in current year 122 + 1/3 days present in prior year (122 x 1/3) 41 + 1/6 days present in second prior year (122 x 1/6) 20 If 183 days then resident subject to U.S. tax AND MUST REPORT WORLDWIDE INCOME 183 2
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1.3. Nonresident aliens 1.3.1. Individual that does not reside in U.S. but has income from U.S. sources (e.g., dividends from U.S. stocks) 1.3.2. Must pay tax on U.S. income, NEED NOT report worldwide income 1.3.3 Tax depends on nature of income; most income taxed at 30% a. Passive income (e.g., interest, dividends) taxed at flat rate of 30% but subject to treaties (Japan, Sweden, Australia 15%) b. Nonpassive income (earned) taxed at 28% and 34% but subject to treaties 1.4. Age is irrelevant 1.4.1 Child pays taxes on his or her own income; files own return 1.4.2 May pay tax at parents' rates (the so-called kiddie tax) 1.5. State income tax responsibilities 1.5.1 State of residency 1.5.2 Nonresidence: Did taxpayer derive income in a state other than the state in which he is currently living?
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out3 - Introduction to Taxation Chapter 3 Taxable Entities,...

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