Income Tax in The United States - International Aspects

International Aspects

Federal income tax is imposed on citizens, residents, and U.S. corporations based on their worldwide income. To mitigate double taxation, a credit is allowed for foreign income taxes. This foreign tax credit is limited to that part of current year tax caused by foreign source income. Determining such part involves determining the source of income and allocating and apportioning deductions to that income. States tax resident individuals and corporations on their worldwide income, but few allow a credit for foreign taxes.

Federal and state income taxes are imposed on foreign persons on their income within the jurisdiction. Federal rules tax interest, dividends, royalties, and certain other income of foreign persons at a flat rate of 30%. This rate is often reduced under tax treaties. Foreign persons are taxed on income from a U.S. business similarly to U.S. persons. Foreign persons are not subject to U.S. tax on capital gains and certain other income. The states tax non-resident individuals only on income earned within the state (wages, etc.) and tax individuals and corporations on business income apportioned to the state. Most of the states otherwise do not impose income tax on persons not resident in the state.

The United States has income tax treaties with over 65 countries. These treaties reduce the chance of double taxation by allowing each country to fully tax its citizens and residents and reducing the amount the other country can tax them. Generally the treaties provide for reduced rates of tax on investment income and limits as to which business income can be taxed. The treaties each define which taxpayers can benefit from the treaty.