chapter 3 notes


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C HAPTER T HREE TAXABLE ENTITIES, TAX FORMULA, INTRODUCTION TO PROPERTY TRANSACTIONS LECTURE OUTLINE I. INTRODUCTION A. Taxable entities. There are only three types of entities subject to tax under the Federal income tax: 1. Individuals; Note: It may be effective to present the following examples to the class as discussion questions, letting them suggest solutions and debating alternatives. Example. Kris is 16 years old and earned $4,500 from a summer job. Is Kris required to pay tax? The $4,500 of wages is a good example of includable income. Others would be interest and dividend income and gains from the sale of investments. However, $4,500 alone does not generally subject one to tax. If Kris has other income and gains, the total income may be sufficient for her to incur tax. 2. Corporations; and 3. Estates and trusts (fiduciaries). B. Several other entities are either tax-exempt or their income is taxed directly to their owners. II. TAXABLE AND NONTAXABLE ENTITIES A. Individuals. Citizens and residents of the United States are subject to the Federal income tax under § 1 of the Code. 1. They are subject to tax on all forms of taxable income, regardless of source. 2. A sole proprietor's business transactions are reflected in his or her taxable income. The income and expenses from the business are treated similarly to other forms of taxable income and deductible expenses. Refer the students to Schedule C, which appears in Appendix B. 3. A U.S. citizen or resident is taxed on worldwide income regardless of whether he or she lives in the U.S. The source of the income is irrelevant (U.S. or foreign). Possible double taxation (once by foreign country and again by the U.S.) is mitigated in several ways: exclusion of income and credit or deduction for foreign taxes paid. a. Taxpayers may claim either a deduction or credit for foreign taxes paid, generally ensuring that they are not taxed twice. 1. Foreign tax credit a. The credit for foreign taxes paid 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). b. If foreign passive income (dividends, interest, etc.) is less than $300 ($600 for joint filers), the taxpayer may elect out of the complex foreign tax credit calculation and just claim the credit. 2. Deduction of foreign taxes. a. Itemized deduction for individuals. b. Benefit is product of taxpayer's marginal rate and deduction.
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b. Exclusion is available for earned income. 1. "Expatriates" may exclude up to $91,500 (2010) annually of foreign earned income if they maintain their tax home in a foreign country and one of the tests for foreign residency. a. Bona fide resident of foreign country. b.
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This note was uploaded on 07/12/2011 for the course NURSING 000 taught by Professor Clark during the Spring '11 term at Alabama.

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