Cross Border Accounting

>> You are a U.S. citizen
>> You have a “green card”
>> You spent a lot of time in the U.S. over the past 3 years (substantial presence-see US Resident Alien section)
>> Generally if you are a US citizen or resident file 1040 on world-wide income by April 15th (this year April 15, 2008)
>> Must file 1040 if you exceed “filing thresholds”—single $8,750 (under 65); married filing jointly $17,500 (under 65); single dependents if dependent unearned income (interest and dividends) is more than $850 or earned income was more than $5,150 in 2007
>> Parent may elect to report their child’s income on their own return if several conditions are met, such as: the under 18 year old has unearned income more than $850 but less than $8,500 in 2007
>> File Form 4868 if extension of filing is required moving due date to October 15, 2008
>> Tax Tip: If you are a U.S. citizen or green card holder living in Canada-you can get “additional child tax credit” (refundable-IRS cuts you a check) for up to $1,000/child
>> Child must be under age 17 at end of 2007 and be a U.S. citizen or resident (green card holder living in Canada—considered U.S. resident for tax purposes)
>> Catch is that you don’t claim FEIE (Foreign Earned Income Exclusion)-Form 2555-EZ to exclude up to $85,200 U.S. for Canadian income earned
>> The FEIE shelters the “earned income”, so you loose this tax credit
>> In most cases, you’ll still pay no U.S. tax because you can use foreign tax credits instead—it’s more complicated, but this approach should be tested to see if it will get you the refund

>> A resident alien includes anyone visiting the U.S. who meets a “substantial presence test”
>> If the sum of the days while in the U.S. during the current year, plus ½ of 2006 plus 1/6 of 2005 totals 183 or more, then he/she is a resident for U.S. tax purposes
>> What this means is that this person is now liable for U.S. federal income taxes on their Canadian and any other worldwide income
>> While they are also subject to Canadian taxes on the same income, the foreign tax credits they are entitled to based on U.S. Income taxes they pay can be used to eliminate or minimize this double taxation exposure
>> If present in the U.S. fewer than 183 days in 2007 and have a “tax home” – file Form 8840 by June 15 with IRS to claim non-resident status—limits U.S. tax liability to any U.S. source income, such as capital gain from sale of Florida condo

>> Non-resident alien individuals generally subject to 30% withholding on gross U.S. rents (not reduced under Canada-U.S. Treaty on real estate rental)
>> Tenant obligated to withhold
>> Can make “net rental election” to be taxed on net rental income (election is to treat rental income as “effectively connected with a U.S. trade or business”)
>> Election is made with the filing of a 1040NR
>> File Form 4224 “Exemption from Withholding of Tax on Income Effectively Connected with the Conduct of a Trade or Business in the United States” to notify withholding agent (ie., tenant) that 30% withholding is not required

>> If rented for less than 15 days a year, do not include rental income and do not deduct expenses
>> If used personally for more than the greater of 14 days or 10% of total rented days then divide expenses based on number of days. Deductions are restricted if a loss is created
>> If neither of these situations applies, then the only restriction could be passive activity loss rules
>> If you change from personal use to rental use, prorate expenses for the year
>> If not rented for profit deduct only rental expenses up to amount of rental income

>> Taxpayers can deduct 3% of their income derived from certain qualified production activities under what is generally referred to as Code Section 199
>> Generally no opting out of this deduction, unless less than 5% of total gross receipts derived form items qualifying as domestic production gross receipts (then treat as non-domestic production receipts—don’t take deduction)
>> Taxpayers may deduct an amount that is equal to a % of the lesser of their qualified production activities income, or their AGI (adjusted gross income)
>> Deduction is further limited, however, by an amount that is equal to 50% of W-2 wages paid by the taxpayer during the calendar year
>> The small business simplified overall method- under which a taxpayer with average annual gross receipts of $5 million or less and total costs for the current taxable year of $5 million or less and is not eligible to use the accrual method, may ratably apportion deduction between domestic production gross receipts and other receipts based on relative gross receipts (instead of having to go on an item-by-item basis)

>> Non-residents file their tax return on Form 1040NR (mailed to Austin, Texas)
>> Canadian’s taxed only on U.S. source income
>> Tax treatment of U.S. source income depends on whether alien’s income is connected to a U.S. business
>> If income is “connected” to a U.S. business it is taxed in same manner as a U.S. citizen/resident
>> If income is NOT connected to a U.S. business it is taxed at a flat rate of 30% unless this rate is reduced by a tax treaty
>> Canada-U.S. tax treaty applies a tax rate of 15% on dividends, 10% dividen on pensions

>> If a non-resident’s taxes would be reduced by a tax treaty, the alien can have the withholding taxes levied against that income reduced to reflect the lower treaty tax rate