1 / 19

The Taxation System of the U.S. Selected Topics on U.S. Taxation

The Taxation System of the U.S. Selected Topics on U.S. Taxation. Munich, 29 May 2008 Lee B. Serota, Certified Public Accountant Ernst & Young AG. Outline. Overview of the U.S. Tax System Taxation of Individuals Definition of US Citizen/Resident

Antony
Download Presentation

The Taxation System of the U.S. Selected Topics on U.S. Taxation

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. The Taxation System of the U.S. Selected Topics on U.S. Taxation Munich, 29 May 2008 Lee B. Serota, Certified Public Accountant Ernst & Young AG

  2. Outline • Overview of the U.S. Tax System • Taxation of Individuals • Definition of US Citizen/Resident • Substantial Presence Test (residency termination) • Measurement of Taxable Income and components of Income and Deductions • U.S. federal income tax rates • Non-Residents • Corporate tax rates • State tax rates • Requirements for U.S. (and State) Payroll • Social Security and Totalization Agreement • 401(k) plans

  3. Overview of the U.S. tax system • Federal taxes- Individual income tax (graduated rates up to 35%)- Corporate income tax (graduated rates up to 35%)- Estate, gift and GST (graduated rates up to 45%, reduction to 0% 2010)- Excise taxes • State/local taxes- Individual income tax- Corporate income tax- Estate, gift and inheritance taxes- Property tax- Sales tax

  4. Some basic terms and concepts • Inbound taxation: U.S. business/investment activities of foreign persons • Outbound taxation: Foreign business/investment activities of U.S. persons • United States person- resident alien- domestic corporation, partnership or trust • Foreign person- nonresident alien- foreign corporation, partnership or trust

  5. Taxation of Individuals • Personal Scope- Definition of residence- Begin / end of residency- Income tax treaties • Worldwide (“unlimited”) taxation of US citizens / resident aliens- All income from whatever source derived- Tax rates (reduced for certain categories of income)- Avoidance of double taxation (foreign tax credit, foreign earned income exclusion) • Source-based (“limited”) taxation of nonresident aliens- Gross and net-based taxation- Source rules, withholding tax- “trade or business”

  6. US Citizen / Resident • US citizens • “All persons born or naturalized in the United States”US Constitution, XIV Amendment • Born outside the U.S. – statutory requirements (e.g., US citizen parent)http://www.uscis.gov/graphics/services/natz/English.pdf • Naturalization: Immigration and Nationality Act (INA)http://www.uscis.gov/graphics/services/natz/index.htm • Resident alien defined in U.S. Internal Revenue Code (IRC) Sec. 7701(b) • permanent resident visa (“green card”)or • substantial presence

  7. Resident alien: Definition (IRC Sec. 7701(b)) • Permanent resident visa = “Green card” test- Starting date: first day present in the US with green card- Ending date: rescission of visa (final determination necessary) • “Substantial presence” test- 183 day rule – weighted over a three year period: 100% of current year days 1/3 of days in preceding year 1/6 of days in second preceding- minimum of 31 days of presence in current year

  8. Example: Substantial presence test • Aufenthalts- • Jahr tage GewichtungErgebnis • 2007 120 1 120 • 2006 150 1/3 50 • 2005 60 1/6 10 • 180

  9. Example: Substantial presence test • Aufenthalts- • Jahr tage GewichtungErgebnis • 2007 120 1 120 • 2006 150 1/3 50 • 2005 60 1/6 10 • 180 • As the formula totals less than 183 days, the individual is considered a nonresident of the US.

  10. Example: Substantial presence test Aufenthalts- • Jahr tage GewichtungErgebnis • 2007 122 1 122 • 2006 122 1/3 40 2/3 • 2005 122 1/6 20 1/3 • 183 • As the total is 183 days, the individual is considered a resident of the US. • Residence begins in 2007 with the first day present in the US in 2007(Exceptions)

  11. Exceptions: Substantial Presence • Presence in the US for certain individuals is disregarded (IRC Sec. 7701(b)(5))- Diplomats- Teacher, trainee, student (subject to time limitations)- Professional athletes competing in a charitable sports event- “Get sick in the US” – US presence extended for medical reasons arising in US • Closer connection exception (IRC Sec. 7701(b)(3)(B))- Current year presence in the US is less than 183 days,- “Tax home” is in a foreign country (cf. IRC Sec. 911, 163 and treaty term “permanent home”) and- Closer connection to such foreign country than to the US (cf. Reg. § 301.7701(b)-2(d) and treaty term “center of vital interests”)Limitations, e.g., in case of pending green-card application;timely-filed US tax return

  12. Taxable income – US citizen / resident • Income – US taxation of worldwide income using US income tax principles • Deductions (Adjustments) & Itemized Deductions- historical distinction to achieve tax policy goals- Adjustments: usually fully deductible expenses incurred in connection with a trade or business or the production of income (exceptions: e.g., certain medical expenses, IRA)- Itemized Deductions: limited deductibility of expenses that include items incurred for personal purposes (e.g., deduction of qualified residence interest or medical expenses) • Standard Deduction:- minimum allowed deduction in lieu of itemizing- 2007: $ 10.700 (MFJ) $5.350 (single) & (MFS) • Personal exemption:$ 3.400 (2007)- available for taxpayer and certain dependents (e.g., dependent children) • Form 1040 used by US citizen/resident; No final assessment notice from the Internal Revenue Service (IRS)

  13. Federal Income Tax – Individuals (2007) • Dividends – reduced rates through 2010- 15 % (taxpayers in 10% or 15% bracket)- “qualified dividend”: derived from domestic and certain foreign corporations • Capital gains – reduced rates through 2010- long-term capital gains (held for more than one year)- 15 % (taxpayers in 10% or 15% bracket)- 25 % tax imposed on depreciation recapture (real property)- “capital asset”- IRC Sec. 1221- Deductibility of losses up to $3,000 (MFJ) or $1,500 (MFS)- Special treatment of property used in a trade or business (IRC Sec. 1231)

  14. Federal Income Tax – Individuals (2007) * • 10 % ledig Single(S) - $ 7.825 • zusammen Married filing jointly (MFJ) - $ 15.650 • getrennt Married filing separately (MFS) - $ 7.825 • 15 % Single from $ 7.825 to $ 31.850 • Married filing jointly from $ 15.650 to $ 63.700 • Married filing separately from $ 7.825 to $ 31.850 • 25 % Single from $ 31.850 to $ 77.100 • Married filing jointly from $ 63.700 to $ 128.500 • Married filing separately from $ 31.850 to $ 64.250 • 28 % Single from $ 77.100 to $ 160.850 • Married filing jointly from $ 128.500 to $ 195.850 • Married filing separately from $ 64.250 to $ 97.925 • 33 % Single from $ 160.850 to $ 349.700 • Married filing jointly from $ 195.850 to $ 349.700 • Married filing separately from $ 97.925 to $ 174.850 • 35 % Single over $ 349.700 • Married filing jointly over $ 349.700 • Married filing separately over $ 174.850 * Additional tax tables apply to an individual „head of household“ and to trusts/estates

  15. Nonresident aliens – Taxable Income • US Nonresidents are taxable in the US on their US source income • Two categories – IRC Sec. 871(a) and (b)1. non-ECI: „income which is not effectively connected with the conduct of a trade or business in the United States“ IRC Sec. 871(a) → gross tax of 30%2. ECI: „income which is effectively connected with the conduct of a trade or business in the United States“ IRC Sec. 871(b)→ net-based tax (gross income less deductions) same tax rates generally applicable to US residents

  16. State taxes • Separate state sovereignty to tax - no binding uniform system • states are not parties to U.S. tax treaties • Examples of tax rates: State Highest individual tax ratesCalifornia 9,3 % Illinois 3 % Texas 0 % Georgia 6 % New York 6,85 % + City Florida 0 %

  17. U.S and State „Payroll“ • Payroll is required to be initiated by an employer for the following employees working within the U.S.: • Employees who are residents of the U.S. (U.S. citizens, Green Card Holders, Resident Aliens who qualify under the Substantial Presence Test). • Non-Residents who receive compensation for which no exemption from U.S. tax exists under a tax treaty (e.g. those employees who compensation is paid or borne by U.S. companies without „charge-back“ or other allocation to a to non- U.S. entity). • Most States within the U.S. have similar payroll rules as above. • Note: underpayment penalties exist which can be charged to the individual for inadequate withholding on wages. Penalties also exist for the Employer if the payroll withholding is not recorded in a timely fashion and paid-in to the tax authorities.

  18. Special Topics—Social Security • U.S. system—maximum amount assessed but no maximum for the 1.45% medicare portion (e.g. Unlimited medicare tax on worldwide compensation subject to the rules). Other elements: • Totalization Agreement between Germany and the U.S. • Certificate of Coverage to maintain coverage in „home country“ • Avoidance of double coverage/taxation • Does not cover U.S. Federal Unemployment Tax (FUTA) or State equivalent (SUTA). FUTA/SUTA generally assessed at the Employer level. • Limited period of time for certificates of coverage • Payroll withholding issue similar to income taxes on wages

  19. Special Topics: IRC §401(k) • A U.S. qualified pre-tax plan at the employer level which provides for a reduction of U.S. (and State) taxable compensation for the employee. Issues: • Allows an employee to reduce his/her taxable compensation on a yearly basis. Example: Gross compensation of $100,000 and amount contributed to the 401(k) is $15,000. Taxable compensation is $85,000. • Restrictions as to when the employee or former employee is allowed to withdraw $ from the 401(k) plan. • Taxation issues when the employee returns to home country and eventually withdraws the amount. • Income tax treaty issues (Article 18: Pensions).

More Related