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 U.S. citizen or resident, you would file Form 1040 on world-wide income by April 15
  • A U.S. 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 2018 “filing thresholds”—single $12,000 (under 65); married filing jointly $24,000 (both under 65); married filing separately $5 (any age); single dependents (under 65 or not blind) if dependent's unearned income (interest, dividend, capital gains, unemployment, taxable social security benefits, pensions, annuities and distributions of unearned income from a trust) is more than $1,050 or your earned income (wages, self employment, tips, professional fees, taxable scholarships and fellowship grants) was more than $12,000 or  your gross income was more than the larger of $1,050 or your earned income ($11,650) plus $350 in 2018
  • There may be other reasons to file the annual U.S. Form 1040, so check the IRS website if in doubt
  • The kiddie tax is simplified in 2018
  • Unearned income will no longer be tied to the parent's tax rate.  It will be taxed at the rates in effect for estates and trusts.  Since that table reaches the 37% tax bracket when unearned income hits $12,500, it is less of an advantage to transfer investment assets to your children than it was in 2017.  On the other hand, earned income will still be taxed at the child's rate in the single tables (reduced in 2018 from 2017).
  • File Form 4868 if extension of filing is required extending the April 15, 2019 due date to October 15, 2019
  • 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 $2,000/child in 2018 (up from $1,000 in 2017)
  • Child must be under age 17 at end of 2018 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 $103,900 U.S. for Canadian "earned" income in 2018 
  • 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 child tax credit 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 2018 year, plus 1/3 of 2017, plus 1/6 of 2016 totals to 183 or more AND at least 31 days were in 2018, then he/she is a resident for U.S. tax purposes
  • All of the days of "physical presence" in the U.S. count as one full day even if it is only part of a day you are present in the country
  • 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. as a non-resident U.S. person with more than 183 days in 2018 and have a “tax home” in Canada– file Form 8840 by June 15, 2019 with the IRS to claim non-resident status—limits U.S. tax liability to U.S. only sourced income, not to include all world wide 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 under passive activity rules
  • 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 15% of the proceeds to the IRS and the non-resident alien with later file Form 1040NR to claim the US gain/loss and the withholding tax paid
  • 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. sourced 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 non-resident alien
  • Married resident of Canada or Mexico 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 non-resident alien 
  • Qualifying Widow with dependent child if they are a resident of Canada (7 point test) 
 
Personal Exemptions
 
  • For 2018, the personal exemption for yourself, spouse and each qualified dependent on your tax return is suspended until December 31, 2025. The offset is the increase in the standard deduction, as noted above 
  • However, you still need to know that if someone (live in boyfriend/girfriend, unemployed brother, or someone else) has lived with you for the whole year in 2018 and has income under $4,150 in 2018, this could be your dependent 
 
Deductions and Changes in 2018
 
  • Can claim certain itemized deductions-Schedule A if greater than the higher 2018 standard deduction
  • Moving expenses (eliminated in 2018)
  • State and local tax deduction capped at $10,000 in 2018
  • Mortgage interest deduction capped at $750,000 loan balances after December 14, 2017 (up to $1 million for loans existing before December 15, 2018) place for joint returns for up to two (2) residences based on acquisition, or build, repair or replacement of home costs
  • No interest deduction is permitted for home equity lines of credit unless the funds are used to build, repair or replace part of the home in 2018
  • Medical expense is reduced
  • Charitable contributions increase to 60% of your 2018 AGI for public charities (increase from 50% permitted in 2017)
  • Casualty and theft losses (eliminated unless related for a federally declared disaster) in 2018
  • Home equity loan interest deduction (eliminated in 2018) 
  • The phase out for itemized deductions based on your AGI income level does not exist for 2018
  • Form 2106-unreimbursed employee expenses (eliminated in 2018)
  • IRA deduction 
  • Self-employment health insurance deduction 
  • Alimony is no longer a deduction to the payer, nor is it income to the recipient in 2018 on new divorce contracts
  • Deduction for excluded scholarship & fellowship grants
  • AMT (alternative minimum tax) kicks in when income reaches $109,400 for joint returns ($54,700 for married filing separately) and $70,300 for all other filers except trusts with phase out above $1 million for couples filing joint and half that for others (except trusts)
 
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. sourced 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 rate

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