The tax filing deadline for expats is near!

If you are an American citizen or a Green Card holder living outside of the country, you are still required by law to file your taxes. This is because the US is one of the very few countries that uses citizenship as the basis for taxation instead of residency. Whichever country you currently live or work in, you will have to file your US Taxes.

The US has plenty of mechanisms to identify and collect taxes from Americans outside of the US. Some of the mechanisms that they have in place are tax treaties that establish clear guidelines for taxing Americans living in another country and the FBAR reporting made through FinCEN. Both aim to curb tax evasion and financial crimes.

Americans living in the homeland are required to file and pay their taxes by April 15, but American citizens living abroad are given two additional months to settle their finances in order for them accurately report their income. Making June 15 the tax filing deadline for American citizens living abroad. If you live abroad and earn income while doing so, here are some things that you should know about reporting foreign income:

You are required to report income earned worldwide

The U.S. tax system is based on the idea that all Americans, regardless of where they live or where they earn their income, should pay taxes to support our country. That’s why Americans living abroad must file U.S. income tax returns and report any worldwide income they receive. Even non-U.S. citizens may need to file a U.S. return if they meet certain requirements (for example, if they own U.S.-based assets).

The good news is that some key tax benefits, such as the foreign earned income exclusion, are available only to those who file U.S. returns—and even if you aren’t eligible for them or are required to file a return anyway, it’s always worth filing because you may be able to claim deductions or credits that will reduce your tax burden!

Any income received or deductible expenses paid in foreign currency must be reported on a U.S. tax return in U.S., not foreign, dollars—as well as any tax payments made in foreign currency must be converted into U.S.

Foreign accounts and assets must be reported

Federal law requires U.S. citizens and resident aliens to report any worldwide income, including income from foreign trusts and foreign bank and securities accounts. The Foreign Account Tax Compliance Act (FATCA) was enacted in 2010 to address offshore tax evasion by U.S. persons holding accounts in foreign banks or other financial institutions located outside of the United States. FATCA requires financial institutions in other countries to report on the assets held by their U.S. clients directly to the Internal Revenue Service (IRS).

The Bank Secrecy Act (BSA) was enacted in 1970 to prevent money laundering and other financial crimes by requiring that individuals, businesses, and organizations file reports with the government about transactions over $10,000 in a single day through a financial institution including banks, stockbrokers, credit unions and others who are required to follow know-your-customer rules that help detect criminal activity such as fraud or money laundering schemes by verifying identity before accepting deposits or withdrawals (often referred to as “structuring”).

Tax Forms are important

In most cases, affected taxpayers need to file Schedule B, Interest and Ordinary Dividends, with their tax returns. Part III of Schedule B asks about the existence of foreign accounts, such as bank and securities accounts, and usually requires U.S. citizens to report the country in which each account is located.

Some taxpayers may need to file additional forms with the Treasury Department such as Form 8938, Statement of Specified Foreign Financial Assets or FinCEN Form 114 (formerly TD F 90-22.1), Report of Foreign Bank and Financial Accounts (“FBAR”).

FBAR. Taxpayers do not file the FBAR with individual, business, trust or estate tax returns. Instead, taxpayers with foreign accounts whose aggregate value exceeded $10,000 at any time during 2021 (or in 2022 for next year’s filing returns) must file a Treasury Department FinCEN Form 114 (formerly TD F 90-22.1), Report of Foreign Bank and Financial Accounts (“FBAR”).

The deadline for filing the FBAR is the same as for a federal income tax return and must be filed electronically with the Financial Crimes Enforcement Network (FinCEN) by April 18, 2022. However, FinCEN grants filers who missed the April deadline are granted an automatic extension until October 15, 2022, to file the FBAR.

Form 8938.

Generally, U.S. citizens, resident aliens, and certain nonresident aliens must report specified foreign financial assets on Form 8938, Statement of Specified Foreign Financial Assets if the aggregate value of those assets exceeds certain thresholds:

• If the total value is at or below $50,000 at the end of the tax year, there is no reporting requirement for the year, unless the total value was more than $75,000 at any time during the tax year

Know if you’re qualified for the Foreign Earned Income Exclusion

Many Americans who live and work abroad qualify for the foreign earned income exclusion when they file their tax return. This means taxpayers who qualify will not pay taxes on up to $112,000 of their wages and other foreign earned income they received in 2022.

The foreign earned income exclusion is a tax law that lets you exclude a portion of your compensation from federal taxes if you work abroad. The exclusion applies only to income you earn through work performed in a foreign country. It doesn’t apply to income from investments or other sources—only employment-related compensation.

Take advantage of Credits and Deductions

Taxpayers may be able to take either a credit or a deduction for income taxes paid to a foreign country. This benefit reduces the taxes these taxpayers pay in situations where both the U.S. and another country tax the same income. However, you cannot claim the additional child tax credit if you file Form 2555, Foreign Earned Income, or Form 2555-EZ, Foreign Earned Income Exclusion.

Get professional tax help

If you’re a taxpayer or resident alien living abroad that needs help with tax filing issues, IRS notices, and tax bills, or have questions about foreign earned income and offshore financial assets in a bank or brokerage account, you probably need the help of a professional that can prepare and file your taxes for you so you can minimize the risk of a mistake in your returns. Remember, if the IRS sees a mistake in your return, whether it’s an honest one or not, they have the power to audit you. So get the help of an Enrolled Agent to minimize your risks and to make sure that you are fully compliant with the tax laws.

Need an Enrolled Agent? Get in touch with us today!

Tax Filing for Canadians living in the US

If you are a Canadian who lives and works in the US, you may find yourself subject to the ever-complicated US taxation system. The US tax system is already complicated for American citizens who have had years navigating their own tax laws, how much more complicated can it be to a novice, like a Canadian who just moved from the great white north to their star-spangled neighbor.

Well, don’t let it discourage you from ever moving! We’ve compiled a list and summarized the most commonly used IRS (Internal Revenue Service) Forms to help Canadians living in the US with their tax filing.

If you make more than the minimum income filing threshold, you’ll need to file IRS Form 1040 or 1040NR. The bulk of your annual US income tax filings will be comprised of additional forms and/or schedules.

You may have heard that the IRS taxes are based on a progressive rate structure, meaning that higher earners pay a higher percentage tax rate. This is true, but there are also other rules and considerations that can impact how much you owe in taxes.

For example, if you’re married and filing jointly with your spouse, there’s an additional step involved: You must fill out a separate form called IRS Form 8332—Marital Status Change, which allows you to elect whether or not to treat your combined income as “community property” rather than individually taxed incomes.

If you do not have an Individual Taxpayer Identification Number (“ITIN”) or Social Security Number (“SSN”), you would need to apply for an ITIN in order to file your US tax return. The IRS will not accept a return that is filed without a valid taxpayer identification number.

An ITIN is issued by the Internal Revenue Service (IRS) for non-resident aliens and foreign nationals who have federal tax reporting or filing requirements and cannot get a Social Security Number (SSN). An ITIN is also issued to dependents living abroad with an SSN whose sole income was earned by their U.S. citizen/resident parents or guardians, and those who have applied for but have not yet been approved for an SSN.

If you are filing taxes in the U.S., it is important that you know what your tax status is so that you can determine if you need an ITIN number before filing your return.

Tax Filing for Canadians working and living in the US

If you’re not a U.S. citizen or Green Card holder and do not meet the substantial presence test, you generally don’t pay taxes on the income you earn outside of the United States, so tax filing as a Canadian in the US is the least of your worries.. However, if you earn any U.S. source income or provide services in the United States, your tax exemption might be removed.

For example, if you are a nonresident alien who was present in the United States for 183 days or more in a calendar year and were engaged in a trade or business in the U.S., all of your income is subject to U.S. tax (unless it is exempt under an international tax treaty).

If you perform services in the United States for a Canadian employer, you may be exempt from US tax and corresponding US tax filing requirements, if:

• Your total compensation does not exceed $3,000 in an aggregate amount,
• You spent in no more than 90 days in the US,
• You were compensated by a Canadian employer that is not engaged in a trade or business within the United States.

The Canada-US income tax treaty contains more exemptions for individuals – residents of Canada – who meet the following requirements when performing services in the United States:

• Your US employment income does not exceed $10,000;
• You are present in the United States for less than 183 days in any 12-month period beginning or ending in the fiscal year concerned, and your remuneration is not paid by, or on behalf of, a person who is resident in the U.S and is not borne by a permanent establishment in the United States.

If you do not meet either of the above, you may need to file a US tax return and pay federal and state income taxes on your US-sourced wages. You can use the Canada-US income tax treaty provisions to reduce or eliminate double taxation.

Another scenario in which a Canadian may be required to file a US tax return is when she/he sells US real property and needs to file a US tax return to report the sale and claim any refund of over withheld US taxes.

The Canadian Revenue Agency has recently made it more difficult for Canadians to claim foreign tax credits for taxes paid in the United States. The CRA now requires you to provide proof of your ultimate tax liability in order to allow a foreign tax credit claimed on your Canadian tax return.

This means that if you have paid taxes in the U.S., you will need to file a U.S. tax return in order to show that you were paying taxes at the same rate as American citizens and permanent residents; otherwise, this will not be possible. This also applies if you are claiming a deduction for property taxes paid on your home or car: these deductions may not be allowed unless you have filed a U.S. tax return showing that those deductions were necessary for purposes of calculating your total income.

IRS Forms you may need to file as a Canadian in the US

IRS Form 1040 – US Federal Income Tax Return

The 1040 form is the standard federal income tax form used to report an individual’s gross income. It allows taxpayers to claim numerous expenses and tax credits, itemize deductions, and adjust income. 1040 is filed by US persons that include US citizens, Green card holders, or residents for US federal income tax purposes.

Form 8833 – Treaty Based Return Position Disclosure

If you are relying on the US-Canada tax treaty, you need to file Form 8833 if you want to be exempted from US tax or to minimize your applicable tax withholdings. Filing Form 8833 late can lead to hefty fines and penalties for you.

1040NR – US Nonresident Alien Income Tax Return

Nonresident aliens are not US citizens, have not passed the green card test or the substantial presence test, and must pay US tax on income earned in the United States. However, if their taxable income is less than the personal exemption amount, they may not be required to file a US return unless proper tax withholding did not take place or if provisions of a treaty between Canada and the United States apply.

Bottomline

Navigating US tax laws without the help of a professional Enrolled Agent to guide you can be risky at best. Making mistakes, even if it is an honest one can lead you to hot water with the IRS. The good news is that you can avoid all the risks by getting the help of a professional Enrolled Agent. Lucky for you, we have what you need! An Enrolled Agent with the right knowledge and experience to help you navigate the ever-changing and complex field of US taxation.

Get in touch with us today!

Tax Filing for Dual Citizens US & Canada

Having dual citizenship means that you have more opportunities to travel, work and live abroad. Dual citizens can move back and forth between countries without restrictions. Despite all of its benefits, there might be an aspect of dual citizenship that you haven’t taken into consideration yet – Taxes!

The US is one of the very few countries that still has its taxation system based on citizenship instead of residency. On the other hand, Canada has its taxation system based on residency and not on citizenship. A stark contrast for dual citizens of Canada and the US. Over a million US citizens are living in Canada and all of them are required to file their income tax returns in both the US and Canada. So if you’re thinking of holding dual citizenship, you have to bear in mind the tax factors associated with the status of dual citizenship. Here’s a guide to help you out when it comes to Tax Filing for Dual Citizens US/Canada

Foreign Account Tax Compliance (FATCA) for Dual Citizens of US & Canada

The Foreign Account Tax Compliance Act (FATCA) was signed into law in 2010, changing the landscape for US citizens.

The Foreign Account Tax Compliance Act aims to stop tax avoidance. The law requires all Americans with significant offshore financial assets to report them every year on Form 8938 It also compels foreign financial firms including banks and investment firms to provide their American account holders’ balance and contact details directly to the IRS.

The impact of FATCA on Americans living abroad has been significant because the IRS can snoop on expats’ finances globally and some foreign banks have simply declined to provide services to Americans due to the additional administrative burden that reporting with the IRS creates. The case for Canada is a special one since the US and Canada have a tax treaty in place.

Financial institutions in Canada are required to go through the process of due diligence in identifying pre-existing accounts under the name of US citizens. As an American in Canada or as a dual citizen of both countries, you might’ve been asked at one point to complete a Form W-9 in Canada.

Aside from the imposed obligations of financial institutions in Canada, US citizens are also required to personally inform the US Department of Treasury through the Foreign Bank Account Report (FBAR) and the IRS about any of their bank accounts in Canada or any other foreign country.

Certain accounts are exempt from the FATCA reporting requirement (not taxpayer’s individual reporting, but rather the reporting to the CRA under the IGA). Examples of such exempted accounts include Registered Retirement Savings Plan (RRSP), Registered Retirement Income Fund (RRIF), Registered Education Savings Plan (RESP), and Tax-Free Savings Account (TFSA).

Check your dual citizenship status

Individuals who have dual citizenship with the United States are subject to U.S. tax laws, even if they live and work outside of the country. Some Americans living in Canada might be unaware of their U.S. tax obligations, as many people do not realize that they must report certain assets on their U.S. tax returns even if they do not live in the country or do not plan on returning to live in the United States. Taxpayers can avoid penalties for failing to report foreign assets by contacting the IRS before the agency contacts them about unpaid taxes or failures to file necessary forms such as FBAR (Report of Foreign Bank and Financial Accounts).

The U.S. immigration law has changed significantly over the decades, and certain provisions have been applied retroactively. So even if you were not born in the United States, you may still be considered a U.S. citizen if your parents or grandparents were U.S. citizens at the time of your birth (in some instances, the parents may not be aware of their U.S. citizenship that they acquired from each of their own parents). If your ancestors obtained their U.S. citizenship, you’d better check your situation and make a determination of whether you may be considered a U.S. person. This can help you avoid any problems with your taxes in the future.

Social Security taxes and benefits for dual citizens of US and Canada

American Dual Citizens who worked in the US or in Canada in 2021, and were either paid by an American or Canadian employer or were self-employed, may have to pay US social security and Medicare taxes.

Dual citizens should be aware that they may still have to pay social security taxes in the country where they live. Signing a Totalization Agreement with 30 other countries prevents double social security taxation because if an American dual citizen is only going to live in Canada for 3-5 years, it’s best to continue paying US social security taxes while living in their host country. If they plan to spend longer than that abroad, they would pay social security taxes in their host country but not in the US. Their contributions to either country count towards future social security entitlement in both. This is an important aspect of tax filing for dual citizens of US and Canada.

Missed the tax deadline?

The IRS has a program that offers amnesty to Americans who are behind on their US tax filing because they weren’t aware they had to file from abroad.

The Streamlined Procedure is a program for Americans and dual citizens who have not filed past US tax returns. It allows Americans to file their last three tax returns and the last six FBARs, without the risk of incurring fines. They can also claim retrospective exemptions on certain taxes that were previously owed, minimizing or eliminating their US taxes altogether.

Americans who are behind with their US tax filing and want to avoid fines should act now, as the Streamlined program is only available voluntarily, which means catch up before the IRS contacts you.

Ask for professional help

If you are a dual citizen and have both U.S. and Canadian citizenship, you may be able to take advantage of the benefits of having two countries simultaneously claim you as one of their own. However, there are many complexities and costs involved with filing taxes as a dual citizen. Using inexpensive software to file your taxes when all you have is income from a job, living in the United States, and no foreign transactions or foreign assets/accounts is easy and cheap. However, when it comes to cross-border or international tax issues, professional advice from an Enrolled Agent can be beneficial for penalty protection purposes. Send us a message today to get the professional help you need!

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Who Files US 1040 Tax Return?

The 1040 tax return is the most common form of filing a federal individual income tax return in the United States. It is also known as Form 1040 or Form 1040A, depending on whether you are filing jointly, single, or head of household.

The IRS estimates that over 100 million people file their taxes using this form each year. However, not everyone who files taxes does so through the 1040 method—you may choose to file differently based on your income and deductions.

Who is required to file US 1040 tax return?

US Citizens

The United States is one of the few countries in the world that taxes its citizens on their worldwide income, even if they live outside of the country. If you’re a US citizen, you must file a US tax return every year.

Not filing your taxes is illegal and can result in fines or even jail time. You may also be denied entry into the United States.

Green Card Holders

Green Card Holders are required to comply with the filing of US tax form 1040. The Green Card Holder is a person who has been granted permanent resident status in the United States and has demonstrated the intent to reside permanently within the country. It is important for Green Card Holders to file their taxes because they are required to report all of their worldwide income and assets to the Internal Revenue Service (IRS).

Income includes any money that a person receives from work, investments, business ventures, or other sources. Income may be taxable or nontaxable depending on how it was earned. If you are a nonresident alien with no US source income, you do not need to file a tax return unless your gross income exceeds the threshold, excluding gifts or inheritance received from US relatives. The IRS requires nonresident aliens who have US source income over the threshold to file Form 1040NR with their local Enrolled Agent. A very short list of who files US 1040 tax return.

Tax year 2022 filing threshold

In general, you must file Form 1040 if you exceed 2022 “filing thresholds.”

These thresholds are different for each category of filer: married filing jointly, married filing separately, single dependents, and single under 65 or blind.

For example, if you are single and your income is $12,950 or more in a tax year, then you must file Form 1040.

The same goes for other categories of filer: if you’re married filing jointly with your spouse and your combined income is $25,800 or more; if you file as a head of household with a dependent child under 18 and your total gross income is $19,400 or more.

US Resident Alien

A resident alien includes anyone visiting the U.S. who meets a “substantial presence test”, which means that they have been present in the U.S. for an uninterrupted period of at least 183 days during any calendar year, or have been present in the US for at least 183 days during two non-consecutive years within a three-year period. If you are considered a resident alien, you may need to file a federal tax return and pay taxes on your worldwide income, even if you don’t have to file a state tax return.

If you’re a nonresident alien, then your income is taxed only on the income that is sourced within the United States (or its possessions).

Rental of US Property

Property Not Used Personally

So, you’re a non-resident alien individual who is subject to 30% withholding on gross U.S. rents (not reduced under Canada-U.S. Treaty on real estate rental). But what does this mean?

You might not know it, but the United States and Canada have a tax treaty that helps to reduce the amount of taxes you owe on your U.S.-based income.

The tenants of your property are subject to withholding tax. You can also make a “net rental election” to be taxed on your net rental income. The election aims to treat rental income as income that is “effectively connected with a US trade or business”. This election is usually made by filing Form 1040NR

Property Also Used Personally

If you have rented out your property for less than 15 days in a year, you may be able to opt-out of including the rental income from your taxes but you will also not be able to deduct expenses arising from it. If you have personally used the property for more than 14 days or 10% of total rented days (whichever is greater) then you can divide the expenses based on that number of days. However, deductions might be restricted if a loss is made under passive activity rules.

If neither of these situations applies, then the only restriction could be passive activity loss rules.

US Non-Resident Alien.

If you are a non-resident alien that sold your personal condo or any other real estate property in a tax year, then the buyer of your property is required to withhold 15% of the proceeds and remit it to the IRS. You will then have to file Form 1040NR to claim the corresponding capital gain or loss on the sale, along with the withholding tax paid along with Form 8828-A showing that taxes on the sale has been settled.

Resident aliens are not obligated to withhold taxes and they are required to pay income tax on any capital gains that they’ve realized when they file Form 1040 with Form 1099-S bearing the date and amount of the sale. Now that answers the question who files US 1040 tax return when it comes to renting out a property in the US.

In a nutshell

With the US being one of the very few countries in the world that still has its taxation system based on citizenship instead of residency, treading US tax laws can be quite complicated and dangerous if you are not well versed with the ever-changing tax laws and policies. We hope we answered the question Who Files US 1040 Tax Return, but if you don’t want to risk the ire of the IRS, then you can make your life easier by getting in touch with us! Send us a message today to get proper professional assistance for your taxes! Our Enrolled Agent is always ready to help you out!

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