US-Canada Cross Border Tax Accounting

Who Files a US Form 1040?

You generally need to file Form 1040 if:

• You are a US citizen.

• You have a green card.

• You spent significant time in the US over the past three years (see the substantial presence test below).

If you are a US citizen or resident, you file Form 1040 on your worldwide income by April 15, 2026 for the 2025 tax year. A US citizen living in Canada is required to file Form 1040 by June 15, 2026, but must still pay any balance due by April 15, 2026.

2025 filing thresholds

For most people, you must file Form 1040 if income exceeds:

• Single, under 65: $15,750
• Married filing jointly or qualifying widow(er), both under 65: $31,500
• Married filing separately, any age: $5
• Head of household, under 65: $23,625

Other rules can also trigger a filing requirement, so check the IRS website if you are unsure.

Kiddie tax and dependent standard deduction

• The kiddie tax applies to children with unearned income over $2,700 in 2025.
• Unearned income above $2,700 is taxed at the parent's tax rate.
• Earned income is taxed at the child's rate in the single tables once it exceeds $15,750.
• The standard deduction for dependents is the greater of $1,350 or earned income plus $450, up to the regular standard deduction of $15,750.

File Form 4868 if you need an extension, moving the April 15, 2026 deadline to October 15, 2026. Estimated taxes should still be paid by April 15, 2026 to avoid or reduce the failure-to-pay penalty.

Child Tax Credit tips for US citizens in Canada

• Nonrefundable Child Tax Credit of up to $2,200 per child under 17, and $500 per qualifying dependent whose income is below $5,200 in 2025, if you provide more than half of their support. Phase-out begins at $400,000 for married filing jointly and $200,000 for all others.
• The Additional Child Tax Credit of up to $1,700 per child is refundable and applies when the standard Child Tax Credit is disallowed.
• You may qualify for these credits if you do not claim the Foreign Earned Income Exclusion (FEIE) on Form 2555, which can otherwise exclude up to $130,000 of Canadian or other foreign earned income in 2025.
• The FEIE shelters earned income, so claiming it can cost you the credit. In most cases, no US tax is due anyway because foreign tax credits can be used instead. It is more complex, but this approach should be tested to see if it produces an Additional Child Tax Credit refund.

US Resident Alien

A resident alien includes anyone visiting the US who meets the substantial presence test.

Substantial presence test

If the days you spent in the US during 2025, plus one-third of your 2024 days and one-sixth of your 2023 days, total 183 or more (and at least 31 of those days were in 2025), you are a resident for US tax purposes. Every day of physical presence counts as a full day, even a partial day.

What this means

• The individual is now liable for US federal income taxes on Canadian and other worldwide income.

• Canada also taxes the same income, but foreign tax credits based on US-source tax paid can reduce or eliminate double taxation.

• If you are in the US as a non-resident with fewer than 183 days in 2025, and your tax home is Canada or another foreign country, file Form 8840 by June 15, 2026 to claim non-resident status. This limits US tax liability to US-source income rather than worldwide income.

Rental of US Property

Property not used personally

• Non-resident aliens are generally subject to 30% withholding on gross US rents (not reduced under the Canada-US treaty for real estate rental).

• The tenant is obligated to withhold.

• You can make a net rental election to be taxed on net rental income, treating rental income as effectively connected with a US trade or business.

• The election is made when you file Form 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 the withholding agent (i.e. tenant) that 30% withholding is not required.

Property also used personally

• If rented for fewer 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, divide expenses based on the number of days. Deductions may be restricted if a loss is created under passive activity rules.

• If neither situation applies, passive activity loss rules may be the only restriction.

• If use changes from personal to rental, prorate yearly expenses.

• If not rented for profit, deduct rental expenses only up to the rental income.

Sale of US property by a non-resident alien

• If a non-resident alien sells a personal condo or other US property, the buyer must withhold and remit 15% of the proceeds to the IRS. The seller later files Form 1040NR to claim the US gain or loss and the withholding tax paid, along with Form 8288-A showing US withholding taxes paid.

• Resident aliens have no tax withheld and pay income tax on any capital gain when they file Form 1040, with Form 1099-S showing the date of sale and the proceeds.

Taxation of US Non-Residents

• Non-residents file their tax return on Form 1040NR.

• Canadians are taxed only on US-source income on Form 1040NR.

• How US-source income is taxed depends on whether it is connected to a US business.

• If income is connected to a US business, it is taxed the same way as for a US citizen or resident.

• Income not connected to a US business is taxed at a flat 30%, unless a tax treaty reduces the rate.

• The Canada-US treaty applies 15% on dividends, 0% on interest, and 15% on pensions.

Filing status for non-resident aliens

Non-resident aliens are limited in the filing statuses they can claim:

• Single resident of Canada or Mexico, or single US national

• Other single non-resident alien

• Married resident of Canada or Mexico, or married US national

• Married filing jointly (only if the spouse is a US citizen or resident alien and the alien elects to be treated as a resident alien for the year, in which case Form 1040 is used)

• Married resident of South Korea

• Other married non-resident alien

• Qualifying widow(er) with dependent child if a resident of Canada (7-point test)

Personal exemptions

• The personal exemption for yourself, your spouse and each qualified dependent remains at $0. This was permanently eliminated by the One Big Beautiful Bill Act (OBBBA), signed July 2025, which made the TCJA suspension permanent. The offset is the higher standard deduction ($15,750 single under 65; $31,500 married filing jointly or qualifying widow(er); $23,625 head of household).

• You may still be able to claim a dependent (for example, a live-in parent, unemployed sibling, or another person) who has lived with you for more than half of 2025 and has income under $5,200, if you provide more than half of their support and they meet the qualifying relative tests.

2025 deductions and changes to note

• Itemized deductions can be claimed on Schedule A if they exceed the 2025 standard deduction.

• The state and local tax (SALT) deduction cap is raised to $40,000 for 2025 under OBBBA.

• Mortgage interest deduction is capped at $750,000 in loan balances after December 14, 2017 (up to $1 million for loans existing before December 15, 2018), for up to two residences on joint returns, based on acquisition, build, repair or replacement costs.

• No interest deduction is permitted on home equity lines of credit unless the funds are used to build, repair or replace part of the home.

• Medical expense deduction is reduced.

• Charitable contributions to public charities are deductible up to 60% of your 2025 income if you itemize.

• Casualty and theft losses can only be claimed if they result from a federally declared disaster in 2025.

• The AGI-based phase-out for itemized deductions does not apply for 2025.

• Form 2106 unreimbursed employee expenses are eliminated.

• The IRA deduction is up to $7,000 (under 50) and $8,000 (50 and over).

• Self-employment health insurance deduction is available.

• Alimony is no longer deductible for the payer or income to the recipient for 2018 divorces onward.

• Deduction for excluded scholarship and fellowship grants is available.

• AMT (alternative minimum tax) applies when 2025 income reaches $137,000 for joint returns and $88,100 for individuals and heads of household, with phase-outs beginning at $1,252,700 for joint filers and $626,350 for individuals, married filing separately, and heads of household.

• New for 2025 under OBBBA: a temporary deduction of up to $6,000 per qualifying individual for taxpayers aged 65 and older, phasing out at higher incomes, available for tax years 2025-2028.

Credits, withholding, and payments

Credits:

• Credits for taxes paid and taxes withheld

• Foreign tax credit (Form 1116)

Withholding:

• If a tax treaty reduces a non-resident's taxes, withholding taxes on that income can be reduced to reflect the lower treaty rate.

Payments:

• Form 1042-S, tax withheld

• Form 8288-A, tax withheld from property sale

• W-2 federal tax withheld

Treaty income is income subject to a reduced tax rate under a treaty. The rest of your US-source income is called non-treaty income.

How the tax is calculated

A non-resident alien's total US tax is the sum of:

1. Tax on treaty income at the treaty rate

2. Tax on non-treaty income effectively connected with a US trade or business, at US graduated rates

3. Tax on non-treaty income not connected to a US trade or business, at a flat 30% or lower treaty rate