The full fair-market value of most assets that you donate to charity can be deducted if you have owned the asset for more than a year. The deduction for assets owned one year or less is limited to your tax basis, which is generally what you paid for the property. Options to purchase company stock that are granted to employees as compensation but do not meet restrictions necessary to qualify as incentive stock options.
See Incentive stock options. There is no tax consequence when the options are granted but when employees exercise the options to purchase stock, the "spread" or "bargain element"—the difference between purchase price and the stock's value—is taxed as additional compensation. Expenses you incur while working for a charity—from the cost of driving your car generally 14 cents per mile to the cost of stamps for a fundraiser—can be deducted as a charitable contribution.
The amount by which the face value of a bond exceeds its issue price. Part of the discount on taxable bonds must be reported as taxable interest income each year that you own the securities.
Passive activities are investments in which you do not materially participate. Losses from such investments can be used only to offset income from similarly passive investments. Passive losses generally can't be deducted against other kinds of income, such as salary or income from interest, dividends or capital gains.
Generally, all real estate and limited-partnership investments are considered passive activities, but there is an exception for real estate professionals and a limited exception for rental real estate in which non-professionals actively participate. Losses you can't use because you have no passive income to offset can be carried over to future years.
Basically, this is interest that doesn't qualify as mortgage, business, student loan or investment interest. Included is interest you pay on credit cards, car loans, life insurance loans and any other personal borrowing not secured by your home.
Personal interest cannot be deducted. In connection with getting a home mortgage, each point is equal to 1 percent of the mortgage amount. Points paid on a mortgage to buy or improve your principal residence are generally fully-deductible in the year you pay them. You get to deduct the points even if you convince the seller to pay them for you, as long as you paid enough cash at closing—as a down payment, for example—to cover the points. Points paid to refinance the mortgage on a principal home or to buy any other property must be deducted over the life of the loan.
Tax breaks allowed under the regular income tax but not under the Alternative Minimum Tax, including the deduction of state and local taxes and interest on home equity loans.
One that is becoming more and more important to more and more taxpayers is the "spread" between the exercise price and the value of stock purchased with incentive stock options. Although that amount is not taxed under the regular tax, it is a preference item subject to tax if you're hit by the AMT. The value of a prize or award is generally taxable, so if you hit the lotto, Uncle Sam is a winner, too. One exception is that certain noncash employee awards—the proverbial gold watch, for example—can be tax-free.
An employee benefit plan—such as a pension or profit-sharing plan—that meets IRS requirements designed to protect employees' interests. Real estate taxes you pay are deductible. For tax years prior to , you can deduct the state and local property taxes you paid on any number of personal residences or other real property you own. When you depreciate investment real estate, your tax basis declines.
To the extent that profit when you sell is due to the reduced basis rather than appreciation , the law recaptures part of the depreciation tax break by taxing that part of your profit up to 25 percent, rather than the regular top 15 percent rate for long-term capital gains.
A fringe benefit, sometimes called a flexible spending account or salary reduction plan that allows an employee to divert some of his or her salary to a special account that is used to reimburse the employee for medical or child care expenses.
Funds channeled through the account escape federal income and Social Security taxes and state income taxes as well. The credit is designed to encourage lower-income workers to save for their retirement. The credit is phased out as income rises.
Taxpayers under age 18 and those claimed as dependents on their parents' returns are not eligible, regardless of their income.
The tax-free transfer of funds from one individual retirement account IRA to another or from a company plan to an IRA. If you take possession of the funds, the money must be deposited in the new IRA within 60 days. Beware that when the rollover method is used to move money from a company plan to an IRA, 20 percent of the amount will be withheld for the IRS, even though the rollover is tax-free if the money is in the IRA within 60 days. To avoid this automatic withholding, use the direct transfer method to move money from a company plan to an IRA.
See Direct transfer. Employers are now allowed to add a Roth option to k plans to allow employees to invest after-tax money with the promise of tax-free withdrawals in retirement. With the regular k , you invest pre-tax money but have to pay tax on all withdrawals in retirement. If your firm offers a matching contribution, it must go into the traditional k , and you will be taxed on distributions from that part of the plan.
The same dollar limits apply to Roth k s as to regular plans. It's called back-loaded because the tax benefits come at the end of the line. You can also roll over funds from a traditional IRA to a Roth IRA—so that all future earnings would be tax-free rather than simply tax-deferred.
This is called a Roth IRA conversion. But to do so, you have to pay tax on the money you move from the old IRA to the Roth. Named after the subchapter of the tax law that authorizes it, an S corporation generally pays no tax because profits and losses are passed on and taxed to the shareholders.
State and local general sales taxes you pay may be deductible if you itemize. But you must choose between deduction sales taxes or deducting city and state income taxes. If you live in a state that does not impose an income tax, claim the sales tax deduction. The IRS has a handy table with estimates based on your income, family size and where you live.
You can add to the table amount sales taxes paid on cars, boats, aircraft and other big ticket items. Purchase of such items could lead some taxpayers in income-tax states to pay more sales tax than income tax. You can choose whichever deduction is most valuable to you. Scholarships and fellowships received by degree candidates to cover tuition, fees, books and supplies are generally tax-free.
But amounts for room and board are taxable. For , the self-employment tax rate is Contributions to the plan are tax deductible. Contributions for the tax year are due by the filing deadline, but you can extend the contribution deadline to October 17, if you extend the due date of your return. The sale of borrowed stock, usually with the hope that the stock price will fall. If it does, the investor profits by repaying the loan with shares purchased at the lower price.
If the stock price increases, the investor loses and has to repay the loan with shares that cost more than those sold. As far as the IRS is concerned, the transaction doesn't count for tax purposes until the investor delivers stock to the lender to close the sale. A key consideration is that the employer generally must match employee contributions up to 3 percent or contribute 2 percent of pay for each employee, whether or not they contribute on their own.
The rules are simpler than for other tax-qualified retirement plans. Congress hopes that this will encourage smaller employers to establish plans. If this happens, you are entitled to a refund of the excess withholding. Generally, to contribute to a traditional or Roth IRA, you must have earned income.
A no-questions-asked write-off that reduces taxable income, the amount of which varies depending on your filing status. Taxpayers age 65 and older or blind get larger standard deductions. Unlike taxpayers who itemize deductions, you need no records to prove you deserve this deduction.
Even if you somehow made it through the year without incurring any deductible expenses, you may still claim the full standard deduction. About two-thirds of all taxpayers use the standard deduction rather than itemize.
Special rules can reduce the standard deduction for children who are claimed as dependents on their parents' returns. If you can claim a child as your dependent on your tax return, the child may not claim a personal exemption on his or her own tax return. The deductible amount you can claim for each mile you use your car for business, charitable, job-related moving or medical purposes without having to keep track of the actual cost. You can also deduct the actual cost of parking and tolls when driving for any of these purposes.
The basis of inherited property is stepped-up to its value on the date of death of the owner, or a slightly later date if chosen by the executor of a taxable estate. In other words, tax on any appreciation during his or her lifetime is forgiven. The heir uses the higher basis to figure his or her gain when the property is ultimately sold.
If the value of property declined while it was owned by the decedent, the basis is stepped-down to date of death value.
You can deduct a portion of the interest you pay on student loans used to pay for college or other post-high school education expenses for yourself, your spouse or your dependents. This tax break is phased out as income rises. You can claim this write-off whether or not you itemize deductions.
This can mean different things. It can refer to income that is taxable such as wages, interest and dividends rather than tax-exempt such as the interest on municipal bonds. On tax returns, "taxable income" is your income after subtracting all adjustments, deductions and exemptions—that is, the amount on which your tax bill is computed. Each tax bracket encompasses a certain amount of income to be taxed at a set rate.
The rates for run from 10 percent to 37 percent. You are said to be in the 22 percent bracket if your highest dollar of income falls in that bracket. Even if you're in the 22 percent bracket, part of your income is taxed at the 10 percent rate and some at 12 percent. Some of your income—such as the amounts protected by your personal and any dependent exemptions and your standard or itemized deductions—is not taxed at all.
Interest paid on bonds issued by states or municipalities that is tax-free for federal income tax purposes. Although you must report this income on your return, it is not taxed. Note that some interest that is exempt from the regular tax is taxed by the Alternative Minimum Tax.
The official inside the IRS who is charged with helping individuals resolve their problems with the IRS, as well as identifying changes in IRS procedures that could make the agency more taxpayer-friendly.
This special tax-computation method for lump-sum distributions from pension and profit-sharing plans is available, but only to taxpayers born before January 2, If you qualify, it could save you a substantial amount. Qualifying taxpayers can deduct a portion of college expenses if their adjusted gross income is under certain limits. This break is available whether or not you itemize deductions, but is not available to students who are claimed as dependents on their parents' return.
It is available to their parents, though, if they pay the tuition. You cannot claim the deduction in the same year you claim an American Opportunity or Lifetime Learning credit for the same student.
But because the income phase-out ranges for this deduction are higher than for the Lifetime Learning credit, some taxpayers whose income is too high to claim the Lifetime Learning credit will benefit from this write-off. The penalty is the IRS's not-so-subtle reminder that taxes are due as income is earned, not just on the tax deadline of the following year.
Basically, it works like interest on a loan, with the penalty rate applied to the amount of estimated tax due, but unpaid by each of four payment dates during the year. The penalty rate is set by the IRS and can change each quarter. There are several exceptions to the penalty. See Estimated tax. Special tax rules apply if you rent out a vacation home, and the rules differ depending on how much you use the home personally.
While all rental income is to be reported, the deductibility of expenses can be limited if you engage in "too much" personal use—generally defined as using the home for more than 14 days during the year or more than 10 percent of the number of days it is rented for fair market rent.
Benefits in a company retirement plan that are yours to keep if you leave the job. Your own contributions, to a k , say, are immediately percent vested.
But employer contributions on your behalf can be vested gradually over a period of time, as a way to encourage you to stay with the employer. If you quit a job when just 50 percent of your benefits are vested, for example, you would forfeit half of the amount the employer has set aside for you. This could make sense if withholding allows you to avoid making quarterly estimated tax payments. To request voluntary withholding, file form W-4V with Social Security.
You can also ask a retirement plan sponsor to withhold from payouts from IRA distributions. The level of earnings to which the full Social Security tax applies. For , the full Employees pay part of the tax—7. Self-employed taxpayers have to pay both halves. The sale of stocks, bonds or mutual fund shares for a loss when, within 30 days before or after that sale, you buy the same or substantially identical securities. The law forbids the deduction of the loss. The amount held back from your wages each payday to pay your income and Social Security taxes for the year.
The amount withheld is based on the size of your salary and the W-4 form you file with your employer. Answer simple questions about your life and TurboTax Free Edition will take care of the rest.
For simple tax returns only. Tax Tips for Employees who Work at Home. Tax Tips for Investors. Tax Exemptions and Deductions for Families. Video: What Are Tax Credits? Tax Terms Glossary. What Are Tax Shelters? What Are Tax Laws? Estimate your tax refund and where you stand Get started. Easily calculate your tax rate to make smart financial decisions Get started. Know how much to withhold from your paycheck to get a bigger refund Get started. Estimate your self-employment tax and eliminate any surprises Get started.
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The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Skip To Main Content. A Accelerated depreciation For most business property, except real estate, the law allows you to depreciate the cost at a rate faster than would be allowed under straight-line depreciation see definition below.
Acquisition indebtedness This is the technical term that Congress uses for what most of us call home mortgage debt, on which the qualifying interest is deductible. Additional child tax credit For , you may qualify for this credit if the regular child tax credit more than wipes out your tax liability. Adjusted basis Your basis in property is the starting point for determining whether you have a gain or loss when you sell it. Adjusted Gross Income AGI This is your income from all taxable sources, minus certain adjustments, and is the key to determining your eligibility for certain tax benefits and the phase-out of your eligibility for others.
Adoption credit This credit effectively refunds to you part of what you pay to adopt a qualifying child. Advocate See Taxpayer advocate. Alimony Qualifying payments to an ex-spouse. Alternative Minimum Tax AMT A special tax designed primarily to prevent the wealthy from using so many legal tax breaks that their regular tax bill is reduced to little or nothing.
Amended return A revised tax return, filed on Form X, to correct an error on a return filed during the previous three years. Audit As if you didn't know, this is a review of your tax return by the IRS, during which you are asked to prove that you have correctly reported your income and deductions. Automobile, business use The cost of driving your car on business can be deducted as a business or employee expense.
Automobile, donating to charity Strict rules control your charitable deduction of a donated vehicle. Automobile, driving for charity The cost of using your car while doing charitable work is deductible.
B Bargain sale to charity Selling property to a charity for less than the property's actually worth. Basis See Adjusted basis. Below-market-rate loans If you make an interest-free or bargain-rate loan to a friend or relative, you may be required to include in your taxable income some of the interest the IRS believes you should have charged. Blind A person is considered legally blind for purposes of qualifying for a larger standard deduction if: He or she is totally blind.
His or her field of vision is 20 degrees or less. Bond premium The amount over face value that you pay to buy a bond paying higher than current market rates. Bonus Depreciation Bonus depreciation is specified in the tax law and allows for taking more depreciation sooner than is generally permitted under ordinary depreciation rules.
Burden of proof The responsibility of the taxpayer to prove that his or her tax return is accurate, rather than the IRS having to provide convincing evidence that it is inaccurate. C Cancelled debt Generally, when a debt is cancelled or forgiven, the borrower who benefits is considered to have received taxable income equal to the amount of the cancelled debt. Capital expenditure The cost of a permanent improvement to property. Capital gain The profit from the sale of such property as stocks, mutual-fund shares and real estate.
Capital loss The loss from the sale of assets such as stocks, bonds, mutual funds and real estate. Casualty loss Damage that results from a sudden or unusual event. Charitable contribution A gift of cash or property to a qualified charity for which a tax deduction is allowed. Charitable mileage See Standard mileage rate. Child- and dependent-care credit Not to be confused with the child tax credit, this one offsets part of the cost of paying for care for a child under the age of 13 or disabled dependent while you work.
For , the American Rescue Plan brings significant changes to the amount and way that the child and dependent care tax credit can be claimed. The plan increases the amount of expense eligible for the credit, relaxes the credit reduction due to income levels, and also makes it fully refundable. D Damages If you receive a settlement in a damage suit that includes money for future medical expenses, the amount is not taxable.
Deductions Write-offs you are permitted to subtract from your gross income to calculate your taxable income. Dependent Someone you support and for whom you can claim a dependent on your tax return.
Depreciation A deduction to reflect the gradual loss of value of business property as it wears out. E Earned income Compensation, such as salary, commissions and tips, you receive for your personal services.
Earned income credit If your adjusted gross income is below a certain amount, you may be able to claim the earned income credit, which might wipe out your income tax bill and even result in a refund of any leftover credit.
Education interest Interest on college loans can be deducted as an adjustment to income, so you get a benefit even if you claim the standard deduction rather than itemizing deductions on your return. Education savings account See Coverdell education savings account. Educator expenses This deduction is allowed for kindergarten through 12th grade teachers for what they spend for classroom supplies. Elderly or disabled credit This credit is for low-income taxpayers age 65 or older at the end of the year, or those who are retired on permanent and total disability.
Electronic filing The fastest way to get your tax return or a request for an extension of time to file to the IRS and state revenue office. Energy credits Residential Energy Efficient Property Credit: This tax credit helps taxpayers pay for qualified residential alternative energy equipment, such as solar hot water heaters, solar electricity equipment The credit, which runs through , is 30 percent of the cost of qualified property through and 26 percent from through Estimated tax If you have income that's not subject to withholding, such as investment or self-employment income, you may have to make quarterly payments of the estimated amount needed to cover your expected tax liability for the year.
Excess Social Security tax withheld If you hold more than one job during the year—either at the same time or successively—too much Social Security could be withheld from your pay. Exemptions For tax years prior to , you can claim a personal exemption for yourself. Expensing Also known as the Section deduction, expensing lets you treat a certain amount of the expenditures that normally would be depreciated over a number of years as current business expenses to be deducted immediately.
F Fellowships See Scholarships and fellowships. Filing status Your status determines the size of your standard deduction and the tax-rates that apply to your income. GROSS PROFITS -- The gross profits from a business transaction are the amount computed by deducting from the gross receipts of the transaction the allocable purchases or production costs of sales, with due adjustment for increases or decreases in inventory or stock-in-trade, but without taking account of other expenses.
The term includes the process by which corporation add credits e. It refers to the period of time a taxpayer spends in each country. To this end the EU has issued directives in the area of indirect and direct taxation. HUT TAX -- Type of poll tax levied on inhabited dwellings or huts generally at an early stage in the development of an economy when it is not feasible to introduce an income tax. In a mortgage that states an insufficient interest rate, tax law will impute a higher rate and a lower principal, which will increase taxes on the receipt of payment.
US system. The statement will show the business's revenues and expenses. An independent contractor is hired to do work according to his own methods and is not subject to the control of an employer except as to the result of his work. The mechanism is essentially one of adjusting payments, profits, gains, taxable income brackets, tax allowances, etc. INPUT TAX -- Term used in connection with VAT to denote the tax embodied in purchases made by a trader or entrepreneur who will usually be able to obtain a credit for the tax that his suppliers have paid on the goods supplied to him which form his "inputs".
Instruments include contracts, notes, and leases e. Intangible property is usually transferred by way of a licensing agreement, and payments for the intangible are made in the form of royalties.
All corporate-source income, whether retained or distributed, is taxed at the appropriate marginal rate in the hands of ultimate shareholders.
The IRM guidelines do not confer any rights on taxpayers. The purposes of the IMF are, inter alia, to promote international monetary cooperation, facilitate the expansion and balance growth of international trade and promote stability in foreign exchange. In broader terms, in includes domestic legislation covering foreign income of residents worldwide income and domestic income of non-residents.
The cost of general services such as management, administrative and similar services may be often allocated among the various members of the group without any profit mark-up, whereas services performed in the ordinary course of business are subject to arm's length conditions.
It adds a certain percentage of the asset's initial cost to the full depreciation write-off and is usually given in the year of acquisition or as soon as possible thereafter. The deductions in this part are individually listed, item by item. The shareholders are generally liable only to the extent of the nominal value of their shares. This can be either an incorporated venture or an unincorporated venture.
The income is taxed at the parent's highest rate of tax. KNOW-HOW -- All undivulged technical information, whether or not capable of being patented, that is necessary for the industrial reproduction of a product or process, i. Payments for know-how may be taxed as royalties in many cases. LANDED COST -- Term used in relation to the importation of goods which means the sum total of the cost of the goods concerned, the amount of customs duties levied on those goods and the expense incurred in unloading them.
Conversely, for tax purposes a partnership is often not regarded as a separate legal entity, its profits being taxed in the hands of the individual partners. What constitutes a legal entity for tax purposes may or may not coincide with what constitutes a legal entity for general law purposes. Tax law does not allow a deduction for such a reserve.
The actual commercial activities are carried out in another country. Royalties are generally paid for the right to use the technology or know-how. LIEN -- A charge against property, making it security for the payment of a debt, judgment, mortgage, or taxes. LIFO -- Method "last in, first out" of valuing inventory or stock-in-trade whereby the goods or materials purchased last are regarded as those which are sold first. An LLC may be taxed as a partnership or a corporation depending on the nature of the status under which it is organized.
A general partner is involved in the management and day-to-day operation of the partnership and is jointly and severally liable for all obligations of the partnership.
A limited partner only makes a financial contribution to the partnership and shares in the profits; he is liable for partnership obligations only to the extent of his investment. Limited partners are usually restricted from taking an active part in the management of the business of the partnership or from allowing their name to be used in the conduct of the business.
Location of immovable property in a country means, in most countries, that the country taxes the income derived therefrom and possibly the value and capital gains realized on alienation, even if the owner is not a resident of that country. Long-term capital gains may be taxed at reduced rates. LOSSES -- The term may broadly be defined as the excess of expenses over revenues for a period, or the excess of the cost of assets over the proceeds when the assets are sold or otherwise disposed of, or abandoned or destroyed.
LOSS RELIEF -- Most income tax laws provide some form of relief for losses incurred, either by carrying over the loss to offset it against profits in previous years carry-back or in future years carry-forward or by setting off the loss against other income of the same taxpayer in the year in which the loss was incurred. Expenses incurred by a taxpayer to provide for his family, former spouse or other relatives.
Expenses for the upkeep or preservation of a building or equipment. In the case of a group of companies it may be important to decide how far the general expenses of management of the group should be charged out to and recovered from the members of the group. MARK-UP -- An increase in the price of something, especially from the price a trader pays for something to the price he sells it for.
In the context of transfer pricing, one method to estimate an arm's length price for transactions between affiliated companies is to increase the supplier's cost by an appropriate profit mark-up Cost-plus method. Usually this does not have treaty status, but the status depends on the document itself.
The mixer company receives income both from countries with a higher tax rate than that of the destination country and from countries with a lower tax rate, which it then pays out as a dividend.
This structure has the effect of averaging out the rate of foreign tax paid. For example, the rules may provide that certain consequences will follow if the sole, main or principal purpose of certain transaction is the reduction of tax. This procedure, described and authorized by Article 25 of the OECD Model Tax Convention, can be used to eliminate double taxation that could arise from a transfer pricing adjustment.
Or portfolio of securities held by an investment company on behalf of investors. Low-income person or family would receive a direct subsidy, called a negative income tax. Many countries levy income tax on this basis.
A trader's operating losses constitute broadly the excess of his operating expenditure over receipts from his operations. The taxable base for resident taxpayers is normally the taxpayer's worldwide net worth, i. In US, the taxable income of a multistate corporation may be apportioned to a specific state only if the corporation has a sufficient nexus in the state.
Usually, a certain minimum amount of nominal capital is required to establish a legal entity. The spread is taxed as ordinary income. For example, a lender may take the property pledged as collateral to satisfy a debt, but has no recourse to other assets of the borrower. Non-residents are usually taxed on income derived from sources within the taxing jurisdiction whereas residents may be taxed on worldwide income.
Founded in , the OECD provides a forum for representatives of countries to discuss and attempt to coordinate economic and social policies. It has an especially significant role in international tax matters. Its website is www. OFFICE -- For purpose of the application of a tax treaty, the office of an enterprise normally forms a permanent establishment if the business of that enterprise is wholly or partly carried on through that office.
A number of countries have special regime for the taxation of offshore banks. An offshore or non-resident owned company is commonly used for captive insurance, marketing abroad, international shipping and tax shelter schemes. Widely adopted principle in tax law, for example, where the taxpayer has the basic responsibility of declaring his taxable income or transactions. Finance Lease OPTION -- Derivative financial instrument consisting of a firm agreement granting one party the right but not the obligation to buy or sell commodities, securities or currencies at a specified future date at a specified price.
ORDINARY SHARES -- Ordinary shares also known as common stock are generally shares with an equal par value and bear equal rights and obligations such as the right to participate in the management of the company by voting at the shareholders' meeting and the right to receive dividends.
The rights of ordinary shareholders to receive dividends are generally subordinate to the rights of bond holders and preference shareholders. The most extreme version of an OID is a zero-coupon bond, which is originally sold far below par value and pays no interest until it matures. A partnership can be a general partnership or a limited partnership depending on the extent of each party's liability.
A general partnership is characterized by the unlimited liability of the general partners for partnership debts. Also see: Limited partnership. Some countries treat a partnership as a separate taxpayer and may subject it to tax on its income and losses as a corporation. Other countries do not consider a partnership to be a separate legal entity and the partnership is treated as tax transparent, with each individual partner being taxed on his share of the profits according to his interest in the partnership.
Face value. Generally, the income or expense is passed to the underlying owner. The inventor of a new article or process usually registers his invention with a government department which confers on him the sole right known as a patent right to use the invention for a limited period of time. They take the form of additions to the tax and are assessed as part of the tax.
Criminal penalties, on the other hand, are enforceable only by prosecution. A prison sentence may be imposed for serious tax fraud. There is usually a deduction for the individual himself, spouse, children and other dependents. The test determines that in such cases the company would, for treaty purposes, be resident in the state in which its place of effective management is situated.
The term "place of management" as such is not defined in the OECD model tax treaty, but may be defined in national tax law.
For example, all depreciable assets of a similar kind are effectively treated as a single asset for depreciation purposes. The portfolio interest exemption does not apply to bank loans made in the ordinary course of business.
Portfolio investors may receive different tax relief or other treatment in respect of their dividends under tax treaties from those accorded to other direct investors. PRECEDENT -- The doctrine of precedent in Anglo-American legal system obliges courts to adhere to principles enunciated in previously decided cases when making adjudications in cases involving the same material facts and legal issues. In the context of a bond or other debt instrument, it is the amount paid in excess of the face amount.
It is a contribution to capital and not taxed as profits. Normally the ruling can be relied upon only by the taxpayer to whom it is issued, not by other taxpayers, and is binding upon the tax authority provided all relevant facts have been disclosed. Many tax treaties include a clause that the right to tax income arising from outside the state is reserved to the sending state. The individual proprietor has the right to all the profits from the business and also the responsibility for all its liabilities.
For tax purposes, a protocol is signed and ratified by the parties in addition to an existing tax treaty. The protocol may be signed simultaneously with the tax treaty or later, and it clarifies, implements or modifies treaty provisions. PUT OPTION -- Contract under which the holder of the option has a right but not an obligation to sell securities or commodities, including foreign currencies, for a specified price during a specified period.
Ramsay Ltd. Rawling , decided by the UK House of Lords in , involved complicated tax avoidance scheme which were marketed in the UK in the s.
The case established that a series of transactions with the purpose of tax avoidance, which ultimately cancelled each other out, could be ignored for tax purposes.
Rates are levied on the occupiers of real property on the basis of the annual rental value of the property. Reciprocity is a basis for relieving a taxpayer under domestic law, e. For example, under tax treaties, reduced withholding tax rates often apply to dividends, interest and royalties.
A number of countries have adopted special regimes to deal with cross-border reinsurance. Repatriation also takes place when expatriate employees working in a foreign country want to send income to their home country. There are legal reserves which may be required by company law and may be necessary before dividends are distributed. Usually a resident taxpayer is taxed on a wider range of income or other taxable items than a non-resident.
Residence in a state is a criteria for invoking a tax treaty of that state, and residence for treaty purposes involves considering the domestic law of residence for tax purposes, and then the requirements in Article 4 of the OECD Model, especially in the case of tiebreaker tests in cases of dual residence.
In the first stage, each participant is allocated sufficient profit to provide it with a basic return appropriate for the type of transactions in which it is engaged. Ordinarily this basic return would be determined by reference to the market returns achieved for similar types of transactions by independent enterprises. Thus, the basic return would generally not account for the return that would be generated by any unique and valuable assets possessed by the participants.
In the second stage, any residual profit or loss remaining after the first stage division would be allocated among the parties based on an analysis of the facts and circumstances that might indicate how this residual would have been divided between independent enterprises. Restricted stock is includable in the gross income of the employee in the first taxable year in which the rights become transferable or no longer subject to forfeiture.
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