| Estimated
Taxes on Foreign Source Income |
Taxpayers who have income that is not subject to wage withholding, or whose withholding is less than the taxes they expect to owe, are required to make quarterly payments of estimated income and social security taxes in order to avoid penalties. Generally, the penalties are in the nature of an interest charge at rates that vary from quater to quarter -- but which are currently in the range of about 6% per annum. In the context of foreign source income, withholding is rarely applicable and the foreign source income will result in an increase in tax that will require the payment of estimated taxes to avoid the penalties. In some cases, the foreign source income may be subject to withholding by a foreign government in which case the foreign income taxes will be available as a credit against the U.S. taxes due on that same income. Where the amounts involved are more than negligible, accurate estimates will require the use of a computer program that will make estimates that include the foreign tax credit. The grantor of a foreign trust is subject to tax on the income of the trust. The U.S. shareholders of a foreign corporation (or IBC) may be required to include some of the income of the foreign corporation in their personal tax return and may therefore have to include that income in their estimated tax payments to avoid penalties. Partners in a foreign partnership will be required to include their share of the income of the partnership in their personal income. Investors in foreign mutual funds (PFIC) who elect to be treated as a Qualified Electing Fund (QEF) will be required to include their share of the income of the fund in their estimated taxes. The same is true of any investors in foreign mutual funds who make a mark-to-market election to compute their share of the fund income based on changes in the market value of the fund shares at ehe end of each year. Additional details and information about estimated taxes is available at http://www.vernonjacobs.com/estimated-tax.htm Vernon Jacobs (C) 2004, all rights reserved |
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