International taxation systems and policy frameworks

Accounting/Finance

Taxation International

citizens are required to file U.S. tax returns and to pay taxes on their international taxable income, regardless of whether they reside inside or outside the United States. The United States also enforces a special tax system on former citizens and former long-term lawful permanent residents whose loss of such status was to avoid paying U.S. taxes. The determination of who is a citizen for tax purposes and when such citizenship is lost is administered by the Immigration and Nationality Act (Income Tax Compliance by U.S. Citizens and U.S. Lawful Permanent Residents Residing outside the United States and Related Issues, 1998).

A non-U.S. citizen normally is taxed in the same manner as a U.S. citizen. If the person is a resident alien then they are also subject to the same filing requirements. A resident alien includes any person who is a lawful permanent resident of the United States at any time during the calendar year. A citizen or resident alien need not file a tax return unless their gross income equals or exceeds certain minimum amounts. Even if a citizen or resident alien is required to file a return, two requirements of the tax code, the foreign earned income exclusion and the foreign tax credit, permit a lot of U.S. citizens or resident aliens who reside abroad to decrease or eliminate their U.S. tax liability (Income Tax Compliance by U.S. Citizens and U.S. Lawful Permanent Residents Residing Outside the United States and Related Issues, 1998).

Citizens living outside the U.S. may be able to eliminate a portion of their foreign source income if they meet certain requirements. "If married and both people work abroad and both meet either the bona fide residence test or the physical presence test, each one can opt for the foreign earned income exclusion. However, the exclusion does not apply to payments made by the U.S. government to its civilian or military employees living outside the U.S." (Harman, 2010).

The foreign tax credit was put into place to relieve a person of the double tax burden when their foreign source income is taxed by both the United States and the foreign country. Normally, if the foreign tax rate is greater than the U.S. rate, there will be no U.S. tax on the foreign income. If the foreign tax rate is less than the U.S. rate, U.S. tax on the foreign income will be restricted to the difference between the rates. The foreign tax credit can only decrease U.S. taxes on foreign source income; it cannot decrease U.S. taxes on U.S. source income. "While no one rule covers all circumstances, it is normally better for one to take a credit for qualified foreign taxes than to deduct them as an itemized deduction. This is because:

1. A credit reduces an individual's actual U.S. income tax on a dollar-for-dollar basis, while a deduction decreases only the income that is subject to tax

2. An individual can choose to take the foreign tax credit even if they do not itemize their deductions. One is allowed to take the standard deduction as well as the foreign tax credit

3. If an individual chooses to take the foreign tax credit, and the taxes paid or accumulated exceed the credit limit for the tax year, they may be able to carry over or carry back the excess to another tax year" (Foreign Tax Credit - Choosing to Take Credit or Deduction, 2011).

"The expatriation tax provisions under Internal Revenue Code (IRC) sections 877 and 877A apply to U.S. citizens who renounced their citizenship and long-term residents who have ended their U.S. resident status for federal tax purposes" (Expatriation Tax, 2011). Different rules apply according to the date upon which one expatriated. People that give up their U.S. citizenship or terminate their long-term resident status for tax purposes after June 3, 2004 are required to confirm to the IRS that they have fulfilled all federal tax requirements for the five years before expatriation. If all federal tax requirements have not been fulfilled for the five ears before expatriation, even if the person does not meet the financial thresholds, the person will be subject to the expatriation tax provisions. People that have expatriated should file all tax returns that are due, in spite of whether or not full payment can be made with the return. Depending on a person's circumstances, a taxpayer filing late may meet the criteria for a payment plan. All payment plans necessitate sustained compliance with all filing and payment responsibilities after the plan is accepted (Expatriation Tax, 2011).