CROSS BORDER 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
* Must file 1040 if you exceed “filing thresholds”—single $9,500 (under 65); married filing jointly $19,700 (under 65-both spouses); single dependents if dependent unearned income (interest, dividends and capital gains) is more than $950 or earned income was more than $5,800 in 2011
* 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 $950 but less than $9,500, had no federal income tax withheld, and made no estimated tax payments in 2011
* File Form 4868 if extension of filing is required moving due date to October 15
* 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 2011 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 $92,900 U.S. for Canadian "earned" income in 2011
* 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

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 year, plus ½ of 2010, plus 1/6 of 2009 totals 183 or more, then he/she is a resident for U.S. tax purposes

* All of the days of "physical presence" in theUSA count as one full day

* 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 2011 and have a “tax home” – file Form 8840 by June 15 with the 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

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 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

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 US 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 the 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

* 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

* 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 a 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” such as:
* Charitable contributions-U.S. only
* Casualty and theft losses
* Job expenses and certain miscellaneous deductions connected to employment
* Reduced by 2% of adjusted gross income (AGI)
* Use Form 2106-unreimbursed employee expenses for:
* 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
* Penalty for early withdrawal of savings 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 aliens 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%