Are you a Canadian who spends your winters in the southern United States, or occasionally conducts work in the US? Many Canadians do not know that they need a work visa to legally conduct business during their stay in the United States. Even more worrisome is that they don’t know that they may be required to file taxes with the IRS. This law also applies to those telecommuting from the US for Canadian businesses. The consequences of declining to pay taxes or not obtaining a work visa can be severe. One could end up being declared an illegal immigrant and being deported! In order to prevent unwanted confrontations with the IRS author Dale Walters breaks down US taxation laws into this easy-to-understand book. America is Taxing Canadians explains exactly who must pay taxes and who remains exempt. Many possible situations are detailed such as what to do if you own property in the United States, have made other financial investments, or have an American spouse or American-born children. Walters also discusses the tax laws as related to income tax and estate tax. This book discusses topics such as: · The basics of US taxation as it applies to snowbirds and cross-border workers · Foreign tax credits · Taxation of Registered Plans, pensions and Social Security · Issues relating to real estate ownership · Taxation of gains · Taxes regarding health insurance America is Taxing Canadians arms you with the information you need to make responsible decisions as a Canadian living and working part time in the United States. Introduction xiii 1 The Basics of US Taxation 1 1. History of the Internal Revenue Service (IRS) 1 2. The Basics 3 3. Dealing with the IRS 4 4. The IRS Examination (Audit) Process 6 5. Filing 8 5.1 When to file your Individual Income Tax Return (Form 1040) 10 5.2 Electronic filing 11 5.3 Penalties and interest for underpayment, late filing, and late payment 11 5.4 Filing status 12 6. Notifying the IRS about Your Change of Address 13 Contents iv Taxation of Canadians in America 2 Your First Year in the US 14 1. Determining US Residency 14 1.1 First year elections 17 2. How Do I Get an Identification Number? 20 3 The Treaty 23 1. Residency 27 2. Real Property 29 3. Dividends, Interest, and Royalties 30 4. Gains 31 5. Personal Services 32 6. Artists and Athletes 33 7. Pensions and Annuities 34 8. Social Security 35 9. Government Service 36 10. Students 36 11. Taxes Imposed by Reason of Death 36 4 Canadian Taxation of Nonresidents 38 1. Who Is Considered a Nonresident of Canada? 39 2. Selling Property in Canada 45 5 Foreign Tax Credits 47 1. What Are Foreign Tax Credits? 48 2. Types of Foreign Income 51 3. How to Calculate the Foreign Tax Credit 52 4. Alternative Minimum Tax (AMT) 55 6 Registered Retirement Plans, Pensions, and Social Security 57 1. Registered Retirement Plans 58 1.1. Deferral 58 1.2 Distributions 59 Contents v 1.3 Planning 61 1.4 How the taxes work 66 1.5 Other types of accounts 70 2. Pensions 71 3. Social Security 72 3.1 The Windfall Elimination Provision 73 7 Investments 74 1. Securities Law 74 2. Mutual Funds 75 2.1 Passive foreign investment company (PFIC) rules 76 2.1a Qualified electing fund (QEF) 77 2.1b Mark-to-market election 78 2.1c Excess distribution 78 3. Tax Reporting Slips 79 4. Taxation of Specific Types of Investments 80 4.1 Municipal bonds 80 4.2 Government bonds 80 4.3 Annuities 81 4.4 Personal residence 81 4.5 Investment real estate 81 5. Treaty Rules That Affect Your Securities 82 8 Common Deductions 84 1. Above-the-Line Deductions 85 2. Trade or Business Expenses 86 3. Vacation or Rental Home Expenses 87 4. Depreciation, Amortization, and Depletion Expenses 91 5. Individual Losses to Property 92 6. Alimony and Child Support 94 7. Contributions to Individual Retirement Accounts (IRAs) 94 8. Moving Expenses 96 9. Health Savings Accounts (HSA) 96 vi Taxation of Canadians in America 10. Qualified Education Expenses and Student Loan Interest 97 11. Exemptions 98 12. Standard Deductions or Itemized Deductions 99 12.1 Standard deductions 99 12.2 Itemized deductions 100 13. State and Local Taxes 101 14. Interest Expenses 101 15. Medical Expenses 103 16. Employee Educational Expenses 105 17. Charitable Contributions 106 18. Miscellaneous Itemized Deductions 108 19. Credits 109 19.1 Child and dependent credit 110 19.2 Credit for the elderly or disabled 110 19.3 Child tax credit 111 19.4 Earned income credit 111 19.5 Education credits 111 19.6 Retirement savings contributions credit 112 19.7 Other credits 112 9 Tax Planning 114 1. Tax Planning in General 116 2. Specific Tax-Planning Opportunities 117 2.1 Your principal residence 117 2.2 Other real estate investments 118 2.3 Securities 118 2.4 Series EE bonds and I bonds 119 3. Tax Breaks for Senior Citizens 119 4. State Income taxes 119 5. Community Property 121 Contents vii 10 US Estate and Gift Taxes 123 1. US Nonresident Estate Tax 127 2. US Resident, Noncitizen Estate Tax 131 2.1 Jointly held property 135 3. Gift Taxes 135 4. Generation Skipping Transfer Tax 137 5. State Estate and Inheritance Tax 138 11 Leaving the US 141 1. Expatriation 142 1.1 Your rights after renunciation of US citizenship 148 1.2 The Reed Amendment 149 2. Tax Planning before You Leave 150 Conclusion 151 Resources 153 About the Authors 157 Tables 1 Income Threshold for Filing 10 2 US Immigration Options 21 3 Your Status: Nonresident Alien or Resident Alien 22 4 Treaty Articles 26 5 Types of Income and Withholding Rates 37 6 RRIF Minimum Withdrawals by Age 63 7 Summary of Expenses 76 8 The Format of the US Individual Income Tax Return (Form 1040) 85 9 Trade or Business Expenses 88 10 Vacation/Rental Home 91 11 Classes of Depreciation Property 92 12 Standard Deduction Amounts 99 13 Additional Deduction Amounts 99 viii Taxation of Canadians in America 14 Limits on Medical Deductions 105 15 Gift and Estate Tax Rate Schedule 132 16 Unified Tax Credits and Exclusion Amounts 133 17 State Estate and Inheritance Tax 138