Tax Consulting International Tax Fundamentals 1 — Questions and Answers
Question 1: Under US tax law, on what basis are US citizens and resident aliens taxed?
- Only on US-sourced income
- On worldwide income regardless of where earned or where they live (Correct answer)
- Only on income earned while physically present in the US
- On income earned in countries without tax treaties with the US
Correct answer: On worldwide income regardless of where earned or where they live
The US taxes its citizens and resident aliens on their worldwide income, regardless of where the income is earned or where the taxpayer resides.
Question 2: The Foreign Tax Credit (FTC) is designed to prevent:
- Taxation of foreign corporations in the US
- Double taxation of foreign income by allowing a credit for taxes paid to foreign governments (Correct answer)
- US citizens from earning income abroad
- Tax evasion through foreign bank accounts
Correct answer: Double taxation of foreign income by allowing a credit for taxes paid to foreign governments
The Foreign Tax Credit allows US taxpayers to credit taxes paid to foreign governments against their US tax liability on the same income, preventing the same income from being taxed twice.
Question 3: The Foreign Earned Income Exclusion (FEIE) allows qualifying US citizens abroad to exclude how much foreign earned income in 2024?
- $80,000
- $100,000
- $126,500 (Correct answer)
- $150,000
Correct answer: $126,500
For 2024, qualifying US citizens and resident aliens living abroad may exclude up to $126,500 of foreign earned income from US taxable income under the FEIE.
Question 4: What test allows a US citizen to qualify for the Foreign Earned Income Exclusion based on physical presence in a foreign country?
- Bona Fide Residence Test
- Physical Presence Test (330-day rule) (Correct answer)
- Substantial Presence Test
- Green Card Test
Correct answer: Physical Presence Test (330-day rule)
The Physical Presence Test requires a taxpayer to be physically present in a foreign country for at least 330 full days during any 12 consecutive months to qualify for the FEIE.
Question 5: Controlled Foreign Corporation (CFC) rules under Subpart F are designed to prevent:
- Foreign companies from operating in the US
- US shareholders from deferring tax on passive income accumulated in foreign corporations (Correct answer)
- Foreign countries from taxing US companies
- Currency manipulation by multinational corporations
Correct answer: US shareholders from deferring tax on passive income accumulated in foreign corporations
Subpart F requires US shareholders who own 10% or more of a CFC to include certain passive and mobile income in their US taxable income currently, preventing tax deferral through foreign subsidiaries.
Question 6: Transfer pricing rules under IRC Section 482 regulate transactions between:
- Domestic corporations and their shareholders
- Related parties in cross-border transactions to ensure arm's length pricing (Correct answer)
- US companies and foreign governments
- Importers and exporters of physical goods only
Correct answer: Related parties in cross-border transactions to ensure arm's length pricing
Section 482 gives the IRS authority to reallocate income between related parties whose cross-border transactions are not conducted at arm's length, preventing profit shifting to low-tax jurisdictions.
Tax Consulting International Tax Fundamentals 1
Under US tax law, on what basis are US citizens and resident aliens taxed?