Chapter 16
U.S. Taxation of
Foreign-Related
Transactions

©2011 Pearson Education, Inc. Publishing as Prentice

16-1

U.S. TAX OF FOREIGNRELATED TRANSACTIONS
(1 of 2)

 Jurisdiction

to tax
 Taxation of U.S. citizens & resident aliens
 Taxation of nonresident aliens
 Taxation of U.S. businesses operating abroad
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16-2

U.S. TAX OF FOREIGNRELATED TRANSACTIONS
(2 of 2)

 Tax

planning considerations
 Compliance and procedural
Considerations
 Financial statement implications

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16-3

Jurisdiction to Tax
 U.S.

authority to tax foreignrelated transactions based on three factors
Taxpayer’s

country of citizenship
Taxpayer’s country of residence
Location where the income is earned ©2011 Pearson Education, Inc. Publishing as

16-4

Taxation of U.S. Citizens and Resident Aliens
 U.S.

citizens and resident aliens taxed on worldwide income
 Income earned in foreign countries or U.S. possessions receives special treatment
 Foreign tax credit
 Foreign earned exclusion
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16-5

Foreign Tax Credit (FTC)
(1 of 5)

 FTC

permits U.S. citizens and residents to avoid double taxation
 FTC directly reduces U.S. tax liability  Creditable taxes
Taxes

paid or accrued in foreign country  U.S.

citizens and residents eligible
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16-6

Foreign Tax Credit (FTC)
(2 of 5)

 Translation

of foreign tax payments

Cash

basis taxpayers use exchange rate on date of payment
Accrual taxpayers use average exchange rate for the year

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16-7

Foreign Tax Credit (FTC)
(3 of 5)

 FTC

limited to lesser of

Foreign tax actually paid OR foreign taxable income
U.S. tax worldwide taxable income x liability

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16-8

Foreign Tax Credit (FTC)
(4 of 5)

 FTC

deducted after nonrefundable credits
 Unused FTC carried back one year and forward ten years on a
FIFO basis to a year where taxpayer has an excess credit limitation  Source of income rules on p. 6
Used

to determine numerator of
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16-9

Foreign Tax Credit (FTC)
(5 of 5)

 Special
Two

FTC limitation

separate baskets of income

1)Passive

income and 2)general limitation income
Foreign tax credit calculated for each basket of income
Excess

FTC from one basket cannot offset excess limitation amounts in another basket
©2011 Pearson Education, Inc. Publishing as

16-10

Foreign Earned Income
Exclusion (FEI) (1 of 5)
 FEI

available to U.S. citizens and resident aliens working abroad
 Eligibility
Bona

fide resident test

Resident

of foreign country uninterrupted for entire tax year and maintain tax home in foreign country

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16-11

Foreign Earned Income
Exclusion (FEI) (2 of 5)
 Eligibility
Physical

(continued) presence test

Taxpayer

must be physically present in a foreign country for 330 full days during a 12-month period, AND
Maintain a tax home in a foreign country during that period

©2011 Pearson Education, Inc. Publishing as

16-12

Foreign Earned Income
Exclusion (FEI) (3 of 5)
 Foreign

earned income

Wages,

salaries, & fees as compensation for personal services actually rendered

 Amount
Lesser

of exclusion of $91,500,

OR
Foreign earned income for current year,
OR
$250.68
©2011
Pearson Education, Inc. Publishing as ($91,500/365 days) x # of 16-13

Foreign Earned Income
Exclusion (FEI) (4 of 5)
 Additional

exclusion for taxable housing allowance
Limitation
[Actual

lesser of

housing cost] – [16% x $91,500],

OR
($40.11/day) x (qualifying days/365), OR
(14% x $91,500) = $14,640
Housing

costs incurred in excess of
$14,640 are a for AGI deduction if not
16-14
provided by employer
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Foreign Earned Income
Exclusion (FEI) (5 of 5)
 Housing

allowance