By way of introduction, the following blogs series is on the various tax topics found in our article, The Expansion of “United States” Taxpayers: How the TCJA Drags Unassuming Foreign Companies and Individuals under its Scope, which explains the Tax Cuts and Jobs Act of 2017’s modification of the Internal Revenue Code. However, before we dive into the critical topics, I wanted to provide a briefer on terms that will be consistently used throughout. Accordingly, please use this blog as an overarching reference for this series. Furthermore, please direct any complex questions to us at asenaadvisors.com, as we specialize in the analysis of these provisions and their global implications for persons and companies trying to protect their wealth.
When going through the blog series, be careful not to confuse society’s common sense notion of these terms with the United States’ definition of these terms for tax purposes.
So, without further adieu, here are the critical terms of the series and their respective “definitions”:
- The “Code”
In the tax world, the “Code” is the nickname given to the Internal Revenue Code. The Internal Revenue Code is Chapter 26 of the United States Code; and the U.S. Code is a compilation of all of the federal statutes. Remember here, that the U.S. legal system is segregated into State and Federal laws, but that the federal tax laws apply to every state. Each state has their own tax laws, but this blog series is solely focused on the federal ones.
IRS stands for the Internal Revenue Service, which is the federal agency that administers the Code. Section 7801 of the Code gives ther IRS to carry out the responsibility of the U.S. Treasury Secretary, of whom has the full authority to effect and enforce tax laws and regulations. If you are a taxpayer then you will submit any reporting obligations and tax payments to the IRS. These tax obligations are typically due on an annual basis; nevertheless, some organizations have a duty to report more frequently based on their classification status.
- The “TCJA”
The Tax Cut and Jobs Act of 2017, or “TCJA,” is the latest legislative amendment to the tax Code. It was signed into law by President Trump in 2017, and has had large ramifications for individuals and businesses alike, both foreign and domestic.
- A “Person”
Under the Code, “the term ‘Person’ shall be construed to mean and include an individual, a trust, estate, partnership, association, company, or corporation.” This can be a hard definition to remember, so whenever this series uses the Code’s definition of Person, it will be capitalized.
Under most tax codes, including the U.S.’s, residency is defined through the usage of tests, and if you pass one of the tests, then you are designated a resident. Accordingly, a Person will be a U.S. Resident if they pass the green-card test, the substantial presence test, or the election test. However, for a person to be classified as a resident under the election test, they must meet the test requirements and elect resident status on their tax return.
An Alien is any Person who is not a U.S. Citizen. Accordingly, an alien can either be a resident alien or a nonresident alien. A Person is a resident alien if they are not a U.S. citizen but are a resident, whereas a Person is a nonresident alien if they are neither a U.S. citizen nor a U.S. resident. Just as the tax implications differ with being a resident vs. a nonresident, the tax implications also differ whether you are a resident alien or a nonresident alien.
Under the Code, “the term ‘taxpayer’ means any person subject to any internal revenue tax.” This definition is broad as a person may become a subject to internal revenue tax through various ways.
- “Gross Income”
In the U.S., taxpayers must determine their gross income prior to determining their taxable income. Gross income is defined as any income from whatever source derived, including, but not limited to, compensation for services, interest, rents, dividends, and trust distributions.
- “Taxable Income”
While gross income is the sum of all income from whatever source derived, taxable income is that income after applicable deductions and credits have been applied. This is the portion of the taxpayer’s income that they must pay tax on.
- “Marginal Tax Rates”
The U.S. determines how much federal income tax a taxpayer must pay on their taxable income through the use of tax tables. The tax tables specify different income brackets, with each bracket having a different applicable tax rate. These tax rates are marginal because as a taxpayer’s taxable income increases, their tax rate does as well.