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Cross Border Tax Preparation & Accounting

Who Files U.S. 1040 Tax Returns?

  • 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 below)
  • Generally if you are a US citizen or resident file 1040 on world-wide income by April 15
  • A US citizen living in Canada is required to file Form 1040 by June 15th, but must pay by April 15th if there is a balance due
  • For most people, you must file Form 1040 if you exceed “filing thresholds”—single $10,350 (under 65); married filing jointly $20,700 (both under 65); married fiing separately $4,050 (any age); single dependents if dependent unearned income (interest, dividends and capital gains) is more than $1,050 or your earned income (wages, self employment) was more than $6,300 in 2016
 
Parents may elect to report their child’s unearned income on their own return for reasons, such as:
 
the under 18 year old child or under age 24 if a full-time student has unearned income (investment income) more than $1,050 but less than $2,100 is taxed at 10% on the parent's return AND amounts over $2,100 are added to the parent's income as ordinary income, qualified dividends or capital gains at the parent's tax rate with a $10,500 threshold in 2016, because...
 
the child had no federal income tax withheld, and made no estimated tax payments in 2016
 
  • File Form 4868 if extension of filing is required moving due date to October 15, 2017
  • 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 2016 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 to exclude up to $101,300 U.S. for Canadian "earned" income in 2016
  • The FEIE shelters the “earned income”, so you lose 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
 

U.S. Resident Alien

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 2016 year, plus 1/3 of 2015, plus 1/6 of 2014 totals 183 or more AND at least 31 days he/she was present in the year in 2016, then he/she is a resident for U.S. tax purposes
All of the days of "physical presence" in the USA count as one full day even if it is only part of a day that you are present in the USA
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 the U.S. citizen or green card holder living in Canada is also subject to Canadian taxes on the same worldwide 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 you are present in the U.S. more than 183 days in 2016 and have a “tax home” in Canada – file Form 8840 by June 15, 2017 with the IRS to claim non-resident status—limits U.S. tax liability to U.S. sourced income, not to include all world income
 

 

RENTAL OF U.S. PROPERTY

 

Property NOT USED Personally

  • Non-resident alien individuals are 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 W-8ECI “Certificate of Foreign Person's Claim the Income is 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
 

Property ALSO USED Personally

  • 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 may be restricted if a loss is created as passive activity losses.
  • If neither of these situations applies, then there are restrictions for passive activity loss rules
  • If you change from personal use to rental use, prorate expenses for the year

 

U.S. Non-Resident Alien

  • If a non-resident alien sells their condo in the tax year, the buyer of their condo is required to withhold and remit 10% of the proceeds to the IRS
  • If they were resident aliens, there would be no tax withheld and they would pay income tax on any capital gain they realize when they file Form 1040
 

TAXATION OF U.S. NON-RESIDENTS

  • Non-residents file their tax return on Form 1040NR
  • Canadian’s taxed only on U.S. source income on their Form 1040NR
  • Tax treatment of U.S. source income depends on whether the 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, 0% on interest and 15% on pensions
 

Filing Status

 
Non-resident aliens are limited as to the filing status they can claim. They can only file as:
  • Single resident of Canada or Mexico or single U.S. national
  • Other single nonresident alient
  • Married resident of Canada or married U.S. national
  • Married filing jointly (only if spouse is a U.S. citizen or resident alien and alien elects to be treated as a resident alien for the year)-in this case Form 1040 would be used
  • Married resident of South Korea
  • Other married nonresident alien
  • Qualifying Widow with dependent child if they are a resident of Canada (7 point test)
 

Personal Exemptions

 
  • Can claim a personal exemption
  • If alien is resident of Canada or Mexico they can take a spousal exemption if the spouse was not claimed as a dependent by another U.S. taxpayer
 

Deductions

  • Can claim certain itemized deductions-Schedule “A”
  • Charitable contributions
  • Casualty and theft losses
  • Miscellaneous itemized deductions connected to conduct of trade or business
  • Reduced by 2% of adjusted gross income (AGI)
  • Form 2106-unreimbursed employee expenses
  • Union dues
  • Safety equipment and small tools
  • Dues to professional organizations
  • Subscriptions to professional journals
  • Tax return preparation
  • Cannot claim standard deduction
  • Can only claim other specific deductions that are connected to the conduct of a U.S. trade or business; these are (“above the line AGI deductions”):
  • IRA deduction
  • Self-employment health insurance deduction
  • Deduction for excluded scholarship & fellowship grants.
 

Credits

  • Can claim credits for taxes paid and taxes withheld
  • Foreign tax credit (Form 1116)

Withholding

  • 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

Payments

  • Form 1042-S-tax withheld
  • Form 8288-A-tax withheld from property sale
  • W-2 federal tax withheld

Taxes

  • Treaty income is income that is subject to a reduced tax rate under the terms of a treaty
  • The remainder of U.S. source income is called non-treaty income
 

The alien's tax is the sum of:

  1. Tax on treaty income calculated at the Treaty rate
  2. Tax on non-treaty income that is effectively connected with a U.S. trade or business calculated at U.S. graduated tax rates, and
  3. Tax on non-treaty income that is not connected to a trade or business calculated at a flat rate of 30% or lower treaty tax rates.

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