Finance and AccountingTaxation

• Overview: The book begins by explaining the foundational principles of U.S. international taxation, including tax residency, citizenship, and the tax obligations of U.S. persons and entities abroad. Dooley delves into the nuances of the tax code, detailing how it applies to global income.

• Example: A U.S. citizen living in France will still owe U.S. taxes on their global income regardless of their residency status.

• Action: Ensure that you understand your tax residency status and its implications. If you’re unsure, consult a tax advisor to determine your obligations and potential tax liabilities.

• Overview: Controlled Foreign Corporations (CFCs) are critical to the international tax landscape. Dooley explains the concept of Subpart F income and how it affects U.S. shareholders of CFCs.

• Example: A U.S. shareholder owning more than 50% of a foreign corporation must include certain types of the foreign corporation’s income (Subpart F income) in their U.S. taxable income even if no distributions are made.

• Action: Review your foreign business structure to identify potential CFCs. If applicable, consider restructuring to minimize Subpart F income. Regularly review your ownership stake in foreign corporations to stay compliant.

• Overview: The Foreign Earned Income Exclusion (FEIE) allows qualifying individuals to exclude a portion of their foreign-earned income from U.S. taxes. Dooley elaborates on the conditions that need to be met, such as the physical presence test and the bona fide residence test.

• Example: An American software developer working in Germany for 330 days can qualify for the FEIE, allowing them to exclude up to the annual threshold ($107,600 in 2020) from their U.S. taxable income.

• Action: Determine your eligibility for the FEIE by assessing your living and working conditions abroad. Maintain meticulous records of your time spent abroad and income sources. File IRS Form 2555 to claim the exclusion.

• Overview: The Foreign Tax Credit (FTC) is designed to alleviate double taxation that occurs when foreign income is taxed both by the U.S. and the foreign country. Dooley explains how to calculate and apply the FTC.

• Example: An American expatriate earning income in Canada, which is subject to Canadian taxes, can claim the FTC for the Canadian taxes paid, offsetting their U.S. tax liability on the same income.

• Action: Keep detailed records of foreign taxes paid, including official tax documents from the foreign country. Use IRS Form 1116 to claim the FTC. Be aware of the carryover rules for any excess credits.

• Overview: Dooley discusses the importance of tax treaties between the U.S. and other countries, which can provide relief from double taxation and outline which country has taxing rights over specific income.

• Example: Under the U.S.-UK tax treaty, certain types of income, like pensions, are generally taxed only by the country of residence, potentially reducing the overall tax burden for retirees.

• Action: Review applicable tax treaties when planning your international tax strategy. Use the IRS website to access the specific treaty text relevant to your situation. Apply the treaty provisions when filing your taxes, which may involve attaching a copy of the treaty clause to your tax return.

• Overview: The Tax Cuts and Jobs Act (TCJA) introduced the Global Intangible Low-Taxed Income (GILTI) regime, which affects U.S. shareholders of foreign corporations by including certain earnings in their U.S. taxable income. Dooley provides strategies for managing GILTI and repatriating funds.

• Example: A U.S. company with a foreign subsidiary must include a portion of the subsidiary’s income as GILTI, subject to a 10.5% tax rate after applying a 50% deduction.

• Action: Analyze the impact of GILTI on your foreign income and consider setting up a Foreign-Derived Intangible Income (FDII) to take advantage of lower tax rates. Engage in tax planning to manage the timing and amount of repatriation.

• Overview: The book details stringent reporting requirements under FBAR (Foreign Bank Account Report) and FATCA (Foreign Account Tax Compliance Act). Dooley highlights the necessity of compliance to avoid severe penalties.

• Example: A U.S. person with foreign accounts exceeding $10,000 must file an FBAR annually, while FATCA requires reporting of specified foreign financial assets if they exceed certain thresholds.

• Action: Inventory all foreign financial accounts and assets. File FinCEN Form 114 for FBAR and IRS Form 8938 for FATCA. Seek professional help if necessary to ensure compliance with reporting requirements.

• Overview: Dooley discusses the tax implications of expatriation for U.S. citizens and long-term residents, focusing on exit tax rules and ways to mitigate potential taxes upon renouncing U.S. citizenship.

• Example: A wealthy individual considering renunciation may be subject to exit tax if their net worth exceeds a certain threshold ($2 million in 2020) or if their average annual income tax liability over the previous five years exceeds a specified amount.

• Action: Conduct a thorough financial analysis before deciding to expatriate. Consult with a tax advisor to plan your expatriation strategy, which may include reducing your net worth or deferring income to minimize exit tax liabilities.

• Overview: The book covers international estate and gift tax considerations, including the application of U.S. gift and estate taxes to foreign assets and the implications of cross-border transfers.

• Example: A U.S. citizen gifting foreign real estate to a family member may be subject to U.S. gift taxes, with the annual exclusion amount applying similarly to domestic gifts.

• Action: Develop an estate and gift plan that accounts for international aspects, such as foreign properties and beneficiaries. Use IRS Form 709 for reporting gifts and seek advice on utilizing applicable exclusions and credits to reduce tax impacts.

• Overview: Offshore trusts and investments can provide tax advantages but come with significant reporting and compliance obligations. Dooley provides guidelines on managing these structures effectively.

• Example: Establishing an offshore trust in a jurisdiction with favorable tax laws can help preserve wealth, but the U.S. grantor may be subject to complex reporting rules and potential adverse tax consequences under the Grantor Trust rules.

• Action: If considering an offshore trust, engage a specialist in international tax law to set up the structure correctly and ensure compliance with U.S. tax rules. Regularly review the trust’s activities and file appropriate reports, such as Form 3520.

1. Determine tax residency status.
2. Review foreign business structures for CFC considerations.
3. Assess eligibility for FEIE and maintain necessary documentation.
4. Keep records and claim the FTC when applicable.
5. Evaluate tax treaties to reduce double taxation.
6. Manage GILTI and plan for efficient repatriation.
7. Comply with FBAR and FATCA reporting requirements.
8. Plan thoroughly before expatriation to mitigate exit taxes.
9. Develop international estate and gift plans.
10. Utilize professional advice for offshore trusts and investments.

Finance and AccountingTaxation