U.S. citizens or resident aliens residing outside the U.S., including Canada, should have filed their U.S. income tax return and other tax related information returns by April 15 (April 18 for 2017). If you missed this deadline, the U.S. Internal Revenue Service (IRS) has implemented an automatic extension until June 15 to file your U.S. tax return. It should be noted that all taxes owing (if any) are to be paid by April 15, the automatic extension only applies to the filing of the tax return.
As a U.S. person residing outside the U.S., you must fulfill your U.S. tax responsibility. Generally, as a non-resident U.S. person you need to file a U.S. tax return only if your income falls in the taxable income bracket for your tax filing status, such as: Single or Married filing Joint, etc. That being said, even though you may not need to file a U.S. income tax return, you still need to comply with other reporting requirements, which can lead to severe penalties in cases of non-compliance.
Here is an overview of certain U.S. tax points that expatriates should be aware of:
Tax Compliance from a U.S. Expatriate (Expat) Perspective
Tax Reporting of Your Foreign (Non) U.S. Income
As a person subject to U.S. tax reporting, you need to report your worldwide income on the U.S. tax return. This includes U.S. sourced and foreign-sourced income. Even if you have never been to the U.S., but have acquired this citizenship through one or both of your parents and your salary is technically your domestic income, you need to report the income.
There are credits and exclusions which prevent the income from being taxed twice (once in Canada, and second time in the U.S), but one has to file the U.S. tax return to claim these exclusions or credits.
If you have never filed a U.S. tax return though you should have, it is highly recommended that you consult a U.S./Canadian cross border tax professional to assist you in being U.S. tax compliant. The cross border tax professional will probably recommend either the Streamlined Filing Procedure, or the Offshore Voluntary Disclosure Program (OVDP) depending on your tax situation. Nonetheless, it is best practice to seek help.
Avoid Double Taxation Cautiously
Due to the U.S.-Canada Tax Treaty, self-employment income is only subject to tax where the income was sourced, i.e. either the U.S. or Canada. However, other income will be subject to tax in both the countries. To avoid double taxation of income, the IRS provides Foreign Tax Credit (FTC) and Foreign Earned Income Exclusion (FEIE), which allow individuals to exclude qualifying income from taxation while reducing the tax liability with the FTC.
Some income may qualify for both FTC and FEIE, but only one of the benefits can be used for each sourced income. Therefore, the decision should be made wisely. Claiming foreign earned income exclusion can also affect your eligibility for other credits. For example, you cannot have both the additional child tax credit and the foreign income exclusion.
One should keep in mind the FTC can be used only to deduct the amount of taxes paid in the foreign country, if there is any additional tax owed, it must be paid.
For example: if the total Canadian tax paid on your taxable income is $600 and on that same set of income the U.S. tax calculated is $1,000, then, FTC can be claimed only up to the $600 paid in Canada, the remaining $400 still has to be paid to the U.S.
Canada Pension Plan Holder or U.S. Social Security Beneficiary
Due to the U.S.-Canada Social Security Totalization Agreement, Canadians working as employees in the U.S. are covered by the U.S. and will pay social security taxes only to the U.S., while Americans working as employees in Canada are covered by Canada and pay social security taxes to Canada. Thus, preventing one from paying Social Security twice. This rule, however, does not apply for those working for less than 5 years. In this case, the person receives coverage form their home country.
Also, the expatriate needs to obtain a ‘Certificate of Coverage’ from the tax authority. A ‘Certificate of Coverage’ serves as proof that the employee and employer are exempt from the payment of Social Security to the foreign country.
Often, large multinational companies provide the option to split their payroll so that a portion of the wages is paid toward Social Security and Medicare throughout the year.
Married To A Non-U.S. Person
The U.S. allows married couples to file their tax return as ‘Married filing Joint’. However, U.S. expatriates should be aware that if they are married to a non-U.S. person (nonresident alien), they cannot file a joint income tax return unless they elect to file a U.S. Joint return with their non-U.S. spouse.
Often, U.S. expatriates married to a non-US resident alien spouse, file their U.S. tax returns as ‘Single’. This can impact their tax deductions, credits, the taxable income brackets, and tax rates.
Additionally, if the expatriate makes a gift to his/her non-resident alien spouse, the unlimited marital deduction is not available and has to file a gift tax return if the value of the gift is more than the authorized annual threshold limit.
It’s Not Just About The U.S. Tax Return But Other Information Returns As Well
Most U.S expatriates assume that since their income is below taxable level, they do not need to file a U.S. tax return, and they are fully tax compliant. Often completely unaware that the U.S. government requires various other reporting requirements under the FATCA regulation.
These forms are penalty-sensitive, and if overlooked, can lead to severe tax consequences. Furthermore, since the U.S. has entered into IDES agreement with various countries financial institutions, banks, and tax authorities to share the financial data of U.S. citizens residing in these countries, it is all the more tough to escape these filings. Taxpayers should be aware that if caught, they cannot rely on the Streamlined filing or OVDP procedure to become U.S. tax compliant.
Under the foreign assets and accounts reporting requirement, you may need to file the FBAR FinCEN Form 114 (Report of Foreign Bank and Financial Accounts) if you had an interest in or signature authority over at least one account outside the U.S. and the aggregate value of all of your foreign accounts exceeded $10,000 at any time in the year.
Additionally, you may also have to file the statement of specified foreign financial assets, Form 8938, and/or Forms 3520/Form 3520-A if you have a foreign (non-U.S.) Trust Account or TFSA.
Note that avoiding FBAR (Foreign Bank Account Reporting) and other information returns could have the non-U.S. resident taxpayer looking at penalties as high as $10,000 for non-willful violations, which may reach close to $100,000 or 50% of the balance in the account, if the taxpayer was fully aware of the reporting requirements but chose not to comply.
For more information on information returns you may be subject to, please check out our article series: Common Tax Issues Faced by U.S. People Living Abroad.
In conclusion, we at A.G. Tax LLP advise that if you are a dual citizen of Canada and U.S. or are in doubt about your U.S. citizenship, you should reach out to a trustworthy cross-border tax expert and confirm your U.S. tax filing obligations to avoid any complicated tax situations.
AG TAX LLP CAN HELP
If you have any tax-related queries, need assistance with tax planning or filing your tax returns please contact us. Our team comprises of highly experienced tax professionals with extensive knowledge of US and Canadian tax laws as well as cross-border compliance.
Furthermore, as a full service accounting firm, AG Tax assures complete assistance with even your most complex tax needs.
We can assist with:
- Canadian Personal and corporate tax returns
- Cross Border Taxation and Business Planning
- US Personal and Corporate Taxation
- Disclosure of Foreign Assets and other information filings
- Retirement planning
- Estate Planning, Inheritance tax advice
To obtain a quote or to arrange for a consultation to discuss your tax related queries, please contact us at:
- 604-538-8735 (Greater Vancouver Area, BC)
- 780-702-2732 (Greater Edmonton Area, AB)
Disclaimer: The information in this publication is accurate as of the time of its publication. AG Tax assumes no responsibility for changes to tax legislation subsequent to the publication of this document. The information provided is for general information purposes only and should not be acted upon without seeking professional advice. If you would like to engage our services, please contact our staff and obtain authorization to send our firm confidential information. A client relationship is not created by the transmission of information. A client relationship is only formed with our firm when a scope and engagement letter signed by the firm and the potential client detailing the terms of engagement is present.