Cross Border Tax Preparation & Accounting Services
- 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 (see substantial presence below)
- Generally, if you are a U.S. citizen or resident, you would file Form 1040 on worldwide income by April 15, 2024 (2023 tax year deadline)
- A U.S. citizen living in Canada is required to file Form 1040 by June 17th, 2024, but must pay by April 15th, 2024, if there is a balance due this tax year 2023
- For most people, you must file Form 1040 if you exceed 2023 “filing thresholds”—single $13,850 (under 65); married filing jointly or qualified widow/er $27,700 (both under 65); married filing separately $13,850 (any age); head of household $20,800 (any age).
- There may be other reasons to file the annual U.S. Form 1040, so check the IRS website if in doubt
- The kiddie tax applies to children with unearned income over $2,500 in 2023
- "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. The unearned income will be taxed at estates and trusts income tax rates or parent's tax rates if election made. On the other hand, earned income will still be taxed at the child's rate in the single tables.
- The standard deduction for dependents is the greater of $1,250 or "earned income" plus $400, up to the regular standard deduction of $12,950.
- File Form 4868 if extension of filing is required extending the April 15, 2024 Form 1040 deadline to the extended due date of October 15, 2024. Note you should pay "estimated taxes" by April 15, 2024 to avoid/reduce the "failure to pay penalty"
- Tax Tip: If you are a U.S. citizen or green card holder living in Canada, you can get a nonrefundable "Child Tax Credit" for up to $2,000/child under 17 years; and $500/"qualifying dependent" if their income is below $4,700 in 2023 and you provide more than half their support; phase out begins at $400,000 married filing joint ($200,000 all others)
- The "Additional Child Tax Credit" of up to $1,600 per "child" is refundable, which applies in cases where the child tax credits are disallowed
- You could be entitled to the "child tax credits" if you don’t claim FEIE (Foreign Earned Income Exclusion)-Form 2555 to exclude up to $120,000 U.S. for Canadian/other foreign "earned" income in 2023
- 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 "Additional 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 2023 year, plus 1/3 of 2022 plus 1/6 of 2021 totals to 183 or more AND at least 31 days were in 2023, 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. sourced 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 less than 183 days in 2023 and have a “tax home” in Canada/or another foreign country– file Form 8840 by June 17, 2024, with the IRS to claim non-resident status if the "physical presence" calculations lead the taxpayer to a "substantial presence" when factoring the above three-year calculation—limits U.S. tax liability to U.S. only sourced income, not to include all worldwide 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 (i.e., 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 personal condo or other property 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 along with Form 8288-A showing U.S. holding taxes 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 with Form 1099-S showing the date of sale and the proceeds.
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 a 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 2023, 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 ($13,850-single under 65; $27,900 -married filing joint or qualified widow; $20,800-head of household)
- However, you still need to know that if someone (live in parent, unemployed brother, or someone else) has lived with you for more than half the year in 2023 and has income under $4,700 in 2023, this could be your dependent if you
2023 Deductions and Changes to note
- Can claim certain itemized deductions-Schedule A if greater than the higher 2021 standard deduction
- Moving expenses (eliminated in 2018)
- State and local tax deduction capped at $10,000
- 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
- Medical expense is reduced
- Charitable contributions are up to 60% of your 2023 income for public charities
- Casualty and theft losses can only be claimed if from a federally declared disaster in 2023
- The phase out for itemized deductions based on your AGI income level does not exist for 2023
- Form 2106-unreimbursed employee expenses (eliminated)
- IRA deduction available
- Self-employment health insurance deduction available
- Alimony is no longer a deduction to the payer, nor is it income to the recipient in 2018 or new divorce contracts thereafter
- Deduction for excluded scholarship & fellowship grants available
- AMT (alternative minimum tax) kicks in when 2023 tax year income reaches $126,500 for joint returns and $81,300 for individuals with phase-out above $1,156,300 for couples filing joint and $578,150 for individuals.
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:
- Tax on treaty income calculated at the Treaty rate
- Tax on non-treaty income that is effectively connected with a U.S. trade or business calculated at U.S. graduated tax rates, and
- 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
Contact Marlies Hendricks
Ready to get started? Let the Certified Public Accountants working with Marlies Hendricks, CPA assist you with your cross border tax service needs. We look forward to speaking with you soon.
