With Mega Million, Power Jackpots Swelling to $1.6B Combined, the Valuation of Large Lottery Payouts Remains an Open Question for Purposes of the Estate Tax

With Mega Million, Power Jackpots Swelling to $1.6B Combined, the Valuation of Large Lottery Payouts Remains an Open Question for Purposes of the Estate Tax

Tax Law
By Anthony Diosdi Thousands of people play various lotteries every day; few actually win. However, for those who do, such winnings may present a good news/bad news situation. The good news being the newfound wealth. The bad news, however, is that notwithstanding the fact that one study has found that nearly one-third of lottery winners become bankrupt, if the lucky winner dies before he or she receives his or her entire payout, the “lucky” winner’s estate may now have some vexing tax problems. Not only will the estate have to pay the federal estate tax based upon the fair market value of the right to receive the stream of lottery payments (which will require cash that the estate may not have available), but the issue to value the lottery prize…
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Demystifying IRS Form 1116- Calculating Foreign Tax Credits

Demystifying IRS Form 1116- Calculating Foreign Tax Credits

Tax Law
By Anthony Diosdi An individual claiming a foreign tax credit must attach Internal Revenue Service (“IRS”) Form 1116, Foreign Tax Credit to his or her tax return. See Treas. Reg. Section 1.905-2(a)(1). This article will go line-by-line through the Form 1116. This article is based on the instructions provided by the Internal Revenue Service (“IRS”) for the Form 1116. The Form 1116 is designed to calculate foreign tax credits for individual taxpayers. Before any taxpayer attempts to complete the Form 1116, he or she should understand some basic rules regarding claiming foreign tax credits. First, U.S. taxpayers are generally subject to U.S. tax on their worldwide income, but may be provided a tax credit for foreign income taxes paid or accrued. The main purpose of the foreign tax credit is…
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What International, Corporate, Estate, and Individual Taxes May Look Like Over the Next Four Years

What International, Corporate, Estate, and Individual Taxes May Look Like Over the Next Four Years

Tax Law
By Anthony Diosdi With the Democrats gaining control of the executive and legislative branch of the government, there will likely be major changes to the Tax Code. Recall that in the 2017, the Tax Cuts and Jobs Act overhauled the corporate and international systems. The Tax Cuts and Jobs Act reduced the corporate income tax rate from a maximum rate of 35 percent to 21 percent. The Tax Cuts and Jobs Act also enacted the global low-taxed income (“GILTI”) and the foreign-derived intangible income (“FDII”) tax regimes. President-elect Joe Biden seeks a major overhaul of the U.S. corporate income tax system. The Biden team also proposes significant changes in the way cross-border transactions are taxed. We will begin with a discussion regarding the proposed corporate tax rate increase. During the…
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A Brief Introduction to the Brand New Schedule Q and Schedule R for IRS Form 5471

A Brief Introduction to the Brand New Schedule Q and Schedule R for IRS Form 5471

Tax Law
Since the Tax Cuts and Jobs Act was enacted, Internal Revenue Service (“IRS”) Form 5471 has given tax practitioners fits. Much of this confusion is the result of the Section 959 ordering and basketing rules. Things are not likely to improve next tax season. This is because the IRS has decided to add two more schedules to Form 5471. Beginning in this tax season, controlled foreign corporation (“CFC”) shareholders could be required to attach all new Schedule Q and Schedule R to the Form 5471. Category 4 and Category 5 filers will be required to attach Schedule Q and Schedule R to their Form 5471. A Category 4 filer is a U.S. person who had “control” of a foreign corporation for an uninterrupted period of at least 30 days during…
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Common Mistakes CFC Shareholders or Their Advisors Make When Computing Tested Income and Tested Loss for the GILTI Taxing Regime

Common Mistakes CFC Shareholders or Their Advisors Make When Computing Tested Income and Tested Loss for the GILTI Taxing Regime

Tax Law
By Anthony Diosdi The Tax Cuts and Jobs Act, created a new global minimum tax on certain foreign income of U.S. shareholders or global intangible low-taxed income (“GILTI”). The Congressional intent of GILTI is to discourage U.S. multinational corporations from shifting the income of foreign subsidiaries into foreign countries with low tax rates. Although GILTI’s intent was to discourage U.S. multinationals from shifting income of foreign subsidiaries into foreign jurisdictions with low tax rates, the mechanical nature of the GILTI’s calculations means it impacts most foreign corporations (“CFCs”) and CFC shareholders. GILTI also triggers unexpected results that may catch unsuspecting practitioners by surprise. GILTI is calculated by including in the income of a CFC shareholder of a CFC the excess of a “deemed tangible return” on its tangible fixed assets.…
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The GILTI High-Tax Election for Multinational Corporations- Be Careful What You Wish For

The GILTI High-Tax Election for Multinational Corporations- Be Careful What You Wish For

Tax Law
By Anthony Diosdi For many years, U.S. multinational corporations were able to utilize a high-tax election to defer Subpart F income. However, when the global intangible low-tax income (“GILTI”) taxing regime was announced in late 2017, a corresponding high-tax election was not available. Shortly after the enactment of the GILTI taxing regime, U.S. multinational corporations and their advisors began lobbying the Department of Treasury (“Treasury”) and the Internal Revenue Service (“IRS”) to issue regulations to permit the use of a high-tax election for GILTI income. On July 20, 2020, the Department of Treasury (“Treasury”) promulgated final regulations which permit a high-tax election for global intangible low-taxed income (“GILTI”). This was welcome news to many U.S. multinational corporations and their advisors. In general, the Final Regulations enable U.S. multinationals to exclude…
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A Deep Dive Into U.S. Estate and Gift Tax Treaties

A Deep Dive Into U.S. Estate and Gift Tax Treaties

Tax Law
By Anthony Diosdi Introduction  In the individual foreign investor setting, inbound tax planning often requires a balancing of U.S. income tax considerations and U.S. federal gift and estate tax considerations. While U.S. federal income tax rates on the taxable income of an individual foreign investor are the same as those applicable to a U.S. citizen or resident, the federal estate and gift tax as applied to individual foreign investors can and often results in a dramatically higher burden on a taxable U.S. estate or donative transfer of a foreign investor than for a U.S. citizen or domiciliary. As a result, for many individual foreign investors, the most important U.S. tax consideration is the U.S. federal estate and gift taxation. The United States imposes estate and gift taxes on certain transfers…
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The U.S. Tax Effects of Entities Used by Foreign Investors

The U.S. Tax Effects of Entities Used by Foreign Investors

Tax Law
By Anthony Diosdi Introduction  Foreign investors typically have the same objectives of minimizing their income tax liabilities from their real estate and businesses located in the U.S. as do their domestic counterparts. However, foreign investors are subject to an even more complicated set of tax laws than their domestic counterparts. Foreign investors must understand the difference between effectively connected income compared to not effectively connected income. Foreign investors must also understand the difference between income earned in a trade or business compared to passive income. These distinctions in income make a big difference for U.S. tax purposes. For example, if a foreign investor derives certain types of passive income from the U.S., the income is typically taxed at a flat 30 percent rate (without allowance for deductions), unless an applicable…
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Things to Know About the 2021 Tax Season

Things to Know About the 2021 Tax Season

tax planning
2020 was an unusual year, to say the least, and taxes were no different. While the pandemic and related financial crisis continue across the country as we enter 2021, what can you expect this year when it comes to your tax filings? The following are some things to know, and you can always discuss the matter more closely with a tax lawyer in San Francisco. No Filing Extension Yet As of now, the tax deadline is the traditional date of April 15, 2021, and there has been no extension announced for filing 2020 taxes by the Internal Revenue Service (IRS). Make your appointment with an attorney now, so you can be prepared to file on time. Income Brackets and Deductions The income brackets and standard deductions were also adjusted for…
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Cross-Border Taxation of the Digital Economy

Cross-Border Taxation of the Digital Economy

Tax Law
By Anthony Diosdi Introduction and Summary of the Law Governing Digital TransactionsNew technology and new transactions often raise difficult issues of tax policy and administration. The dramatic expansion of electronic commerce facilitated by the use of the Internet and other technology is subjecting existing tax principles to new pressures. One area of concern is the application of source rules to electronic commerce transactions. Suppose, for example, that a corporation delivers electronically software or a digital product to a customer on the Internet. The customer can download the product and use it commercially. Depending upon the nature of the transaction and the property interests involved, the income to the corporation might appropriately be characterized as a royalty for the use of technology, profit from the sale of a product or a…
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