SEMINAR 3.

3. INCOME TAX IN USA

In the United States, a tax is imposed on income by the federal, most states, and many local governments. The income tax is determined by applying a tax rate, which may increase as income increases, to taxable income as defined. Individuals and corporations are directly taxable, and estates and trusts may be taxable on undistributed income.

Partnerships are not taxed, but their partners are taxed on their shares of partnership income. Residents and citizens are taxed on worldwide income, while nonresidents are taxed only on income within the jurisdiction. Several types of credits reduce tax, and some types of credits may exceed tax before credits. An alternative tax applies at the federal and some state levels.

Taxable income is total income less allowable deductions. Income is broadly defined. Most business expenses are deductible. Individuals may also deduct a personal allowance (exemption) and certain personal expenses, including home mortgage interest, state taxes, contributions to charity, and some other items. Some deductions are subject to limits.

Capital gains are taxable, and capital losses reduce taxable income only to the extent of gains (plus, in certain cases, $3,000 or $1,500 of ordinary income). Individuals currently pay a lower rate of tax on capital gains and certain corporate dividends.

Taxpayers generally must self assess income tax by filing tax returns. Advance payments of tax are required in the form of withholding tax or estimated tax payments. Taxes are determined separately by each jurisdiction imposing tax. Due dates and other administrative procedures vary by jurisdiction. April 15 following the tax year is the due date for individual returns for federal and many state and local returns. Tax as determined by the taxpayer may be adjusted by the taxing jurisdiction.

Sources of u.S. Income tax laws

United States income tax law comes from a number of sources. These sources have been divided into three tiers as follows:^[42]

• Tier 1

  • United States Constitution

  • Internal Revenue Code (IRC) (legislative authority, written by the United States Congress through legislation)

  • Treasury regulations

  • Federal court opinions (judicial authority, written by courts as interpretation of legislation)

  • Treaties (executive authority, written in conjunction with other countries)

• Tier 2

  • Agency interpretative regulations (executive authority, written by the Internal Revenue Service (IRS) and Department of the Treasury), including:

    • Final, Temporary and Proposed Regulations promulgated under IRC § 7805;

    • Treasury Notices and Announcements;

  • Public Administrative Rulings (IRS Revenue Rulings, which provide informal guidance on specific questions and are binding on all taxpayers)

• Tier 3

  • Legislative History

  • Private Administrative Rulings (private parties may approach the IRS directly and ask for a Private Letter Ruling on a specific issue – these rulings are binding only on the requesting taxpayer).

4. Capital gains tax

A capital gains tax (CGT) is a tax on capital gains, the profit realized on the sale of a non-inventory asset that was purchased at a cost amount that was lower than the amount realized on the sale. The most common capital gains are realized from the sale of stocks, bonds, precious metals and property. Not all countries implement a capital gains tax and most have different rates of taxation for individuals and corporations.

For equities, an example of a popular and liquid asset, national and state legislation often has a large array of fiscal obligations that must be respected regarding capital gains. Taxes are charged by the state over the transactions, dividends and capital gains on the stock market. However, these fiscal obligations may vary from jurisdiction to jurisdiction.

United Kingdom [edit]Basics

Individuals who are residents or ordinarily residents in the United Kingdom (and trustees of various trusts) are subject to an 18% capital gains tax.

For people paying more than the basic rate of income tax, this increased to 28% from midnight on June 23, 2010.

There are exceptions such as for principal private residences, holdings in ISAs or gilts. Certain other gains are allowed to be rolled over upon re-investment. Investments in some start up enterprises are also exempt from CGT. Entrepreneurs' Relief allows a lower rate of CGT (10%) to be paid by people who have been involved for a year with a company and have a 5% or more shareholding.

Every individual has an annual capital gains tax allowance: gains below the allowance are exempt from tax, and capital losses can be set against capital gains in other holdings before taxation. All individuals are exempt from tax up to a specified amount of capital gains per year. For the 2011/12 tax year this "annual exemption" is £10,600.^[21]