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Revised GILTI provisions offer reprieve to U.S. individual investors

Commencing in 2017, the December 2017 Tax Cuts and Jobs Act required  U.S. persons to be taxed on accumulated profits, generally derived from active business income of controlled-foreign corporations (“CFC”s) under section 965 of the IRS Code. This was also known as the transition or repatriation tax. Currently and prior to 2017, specific types of income earned by the CFC, primarily investment income, had to be accrued annually and taxable to the CFC shareholder if certain exclusions and exemptions were not available. For subsequent taxation years, annual active business income as defined as global intangible low-tax income (“GILTI”) under section 951A of the IRS Code must be included in income. This is the continuation of the repatriation tax but in a different form. U.S. corporate investors of CFC Where the U.S. person is a U.S. C corporation, the GILTI provisions provided for a flat 50% deduction of the GILTI under  Section 250 of the IRS Code bringing the tax rate to 10.5% from  the 21% U.S. corporate rate. An election is available under section 960  of   the IRS Code for the C corporation to take an indirect foreign tax credit up to 80% of  the foreign tax incurred by the CFC. Where the effective CFC tax rate was at least 13.12%, this election resulted in no tax to the C corporation on GILTI. U.S. individual investors of CFC For individual U.S. investors, GILTI is included in  their reported adjusted gross income reported on the U.S. 1040  tax return, taxed at their marginal tax rate that could be as high as 37%. However, a similar indirect foreign tax credit as outlined in section 960 available to the C corporation investor is available under section 962 of the IRS Code to the individual. With an annual section 962 election, the IRS Code pretends that the individual is  a corporation and in lieu of including GILTI in adjusted gross income taxed at the marginal tax rate of the individual,  one could compute separately the tax on GILTI by applying the 21% corporate rate  with a foreign tax credit up to 80% of the foreign corporate tax. This section 962 tax payable is...

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Revised U.S. Estate/Gift Tax Exclusions

The December 2017 Tax Cuts and Jobs Act doubled the lifetime exclusion to $11.18M effective for 2018 to 2025, subject to inflation adjustments for subsequent years. The unified tax credit relating to the 2018 exclusion is $4,417,800. For 2019, the exclusion amount is expected to be $11.4M with a unified credit of $4,505,800. After 2025, the foregoing may or may not be approved by Congress to be of a permanent nature. If it is not approved, the thresholds will revert to the pre-existing inflation-adjusted amount.  Taxable gifts made during one’s lifetime are subject to the same graduated tax rates as estate tax. The 2018 $11.18M (2019-$11.4M) lifetime gift tax exclusion/estate tax exclusion is available to U.S. citizens, U.S. domiciliaries and green card holders. Post-1976 taxable gifts are included in the gross estate and credit is given for gift tax previously paid. For years 2015 to 2017, the first $14,000 of gifts of a present interest annually made by a donor to each non-spouse donee, are not included as taxable gifts. For 2018 and 2019, this annual exclusion rises to $15,000. If the recipient spouse is not a U.S. citizen, the annual exclusion is $152,000 for 2018, expected to rise to $155,000  for 2019. Where the recipient spouse is a U.S. citizen, the entire gift is non-taxable. If the value of the gift is above for foregoing noted annual exclusion, then one has to compute the gift tax using the estate/gift tax rate table, that rises to a 40% tax rate at the $1M mark. As the unified tax credit is for both the incidence of estate and gift tax,  the present $11.18M (2018) lifetime exclusion may apply to  U.S. citizen donors. Although for U.S. purposes, this lifetime exclusion, say to gift significant amounts is very attractive, at least to 2025, for those U.S. citizen donors  that reside in Canada, the gifting of appreciable assets will create immediate  income taxation here if the transfer is not to their spouse because a gift in Canada is a disposition for income tax purposes. In Canada, proceeds of disposition for spousal gifts are deemed to be the donor’s tax basis in the asset transferred, unless an election...

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