Authors: James G.S. Yang; Wing W. Poon; Leonard J. Lauricella
Addresses: Montclair State University, 1 Normal Avenue, Montclair, New Jersey 07043, USA ' Montclair State University, 1 Normal Avenue, Montclair, New Jersey 07043, USA ' Montclair State University, 1 Normal Avenue, Montclair, New Jersey 07043, USA
Abstract: This article identifies and discusses some defects and inconsistencies in the application of the foreign tax credit rules. A US taxpayer may have income from the USA and from foreign sources, but both are subject to US taxation. However, the US tax related to the foreign-sourced income is allowed to be offset by the foreign tax credit. The amount of foreign tax credit allowed depends on whether the foreign-sourced income is taxed at a regular rate or at a reduced rate. The latter involves the concept of 'rate differential portion'. This article explains the details and provides a formula. This article further introduces the newly enacted 'net investment income tax', and explores its impact on the determination of the foreign tax credit. In addition, this article reveals that, under current law, the application of the 'rate differential portion' is biased against those taxpayers who are in the lower-tax rate brackets. This article further points out that no foreign tax credit is allowed against the US 'net investment income tax' imposed on foreign-sourced income. It is possible this income will be subject to double taxation. This article also provides a comprehensive example and offers some tax planning strategies.
Keywords: foreign tax credit; net investment income tax; NIIT; general category income; passive income; foreign earned income exclusion; tax credit rules; USA; United States; rate differential portion; lower tax rates; double taxation; tax planning.
International Journal of Accounting and Finance, 2016 Vol.6 No.1, pp.24 - 42
Received: 08 Jan 2015
Accepted: 21 Jan 2016
Published online: 12 May 2016 *