Avoiding Double Taxation Through FTC | Expat Tax Online (2024)

FAQs

How can I avoid double income tax? ›

The United States is a party to tax treaties designed to prevent double taxation of the same income by the United States and the treaty country. Certain treaties allow a U.S. citizen an additional credit for part of the tax imposed by the treaty partner on U.S. source income.

Other state tax credit Credit code 187

You may claim this credit if you had income that was taxed by California and another state. The credit will offset the taxes paid to the other state, so you are not paying taxes twice. This credit applies to: Individuals.

Reimburse shareholder expenses: If a C corp directly reimburses business expenses incurred by shareholders, it can deduct these reimbursem*nts and reduce its total earnings, thereby avoiding double taxation.

Key Takeaways. Double taxation refers to income tax being paid twice on the same source of income. This can occur when income is taxed at both the corporate level and the personal level, as in the case of stock dividends. Double taxation also refers to the same income being taxed by two different countries.

DTTs are international agreements that aim to alleviate double taxation arising from cross-border business activities.

Examples of Double Taxation

The United States' tax code places a double-tax on corporate income with one tax at the corporate level through the corporate income tax and a second tax at the individual level through the individual income tax on dividends and capital gains.

The carried interest loophole allows investment managers to pay the lower 23.8 percent capital gains tax rate on income received as compensation, rather than the ordinary income tax rates of up to 40.8 percent that they would pay for the same amount of wage income.

Key Takeaways

All US citizens are required to file a US tax return regardless of where they live. Dual citizens living abroad risk being taxed twice on their income. The IRS has various tax benefits in place to help dual citizens avoid double taxation.

Despite these broad pronouncements, the taxation of the same person's income by multiple states is often perfectly constitutional.

Where do I pay taxes if I work remotely? ›

A worker may have tax obligations in any state where they reside and possibly the state where their employer's worksite is located. A permanent remote worker will file their personal income taxes in their state of residence, whether they are a W-2 employee or a 1099-NEC independent contractor.

States without income tax

Nine states — Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming — do not levy a state income tax. New Hampshire Department of Revenue Administration. Frequently Asked Questions - Interest & Dividend Tax.

If you are an independent contractor, however, your tax burden is doubled because you are paying both your own share and the employer's share. In total, the self-employment tax is equivalent to 15.3% of net income from your business.

S corps are considered “pass-through entities“, which means their taxable revenues are not taxed at the federal level. Rather, they “pass through” directly to the organization's owners and shareholders' personal tax returns, thus avoiding double-taxation, because S corps themselves do not pay federal taxes.

Two business structures are often preferred for small businesses since they avoid this double taxation burden. These are an LLC and an S Corporation. With these business structures, the company is taxed more like a Sole Proprietorship or a Partnership than as a separate entity, like the C Corporation.

Most commonly, double taxation happens when a company earns a profit in the form of dividends. The company pays the taxes on its annual profits first. Then, after the company pays its dividends to shareholders, shareholders pay a second tax.

In essence, it refers to the situation where the same income is subject to taxation twice, once at the entity level and again at the individual or shareholder level. It's important to note that double taxation is not a mistake or illegal; it is a legal and recognized aspect of the taxation system.

What are the methods used by the United States to reduce the double taxation of income earned by foreign operations of U.S. companies? Exempting some foreign source income and allowing a deduction for all foreign taxes paid.