Taxation of Canadians in America. David Levine
electronically filing, your accountant will require you to sign the US Individual Income Tax Transmittal for IRS e-file Return (Form 8453).
5.3 Penalties and interest for underpayment, late filing, and late payment
If it is determined later (by you or the IRS) that the amount of tax owed is greater than the tax paid when the return was filed, there will be interest due on the underpayment of tax. The interest rate can change quarterly, but it is currently 3 percent for underpayments. The interest is compounded daily.
If you file your return late without a reasonable cause, the IRS will impose a penalty of 5 percent per month, with a maximum penalty of 25 percent. If your return is more than 60 days late, the IRS imposes a minimum penalty equal to the lesser of $135 or 100 percent of the tax due. If the failure to file is fraudulent, the monthly penalty is 15 percent, with a maximum penalty of 75 percent.
If you are late in paying your taxes, the penalty is .5 percent per month, with a maximum penalty of 25 percent. This penalty is in addition to the regular interest charge. This penalty may be doubled (to 1 percent) if after repeated requests to pay and a notice of levy, you do not pay.
As mentioned earlier, the IRS allows you to file for an automatic extension of time, giving you until to October 15 to file your return. However, you must still pay the tax by April 15. There is an exception to the late payment penalty if you paid at least 90 percent of the total tax owed by April 15.
If both the late payment and late filing penalties apply, the .5 percent penalty for late payment (but not the 1 percent penalty for continued nonpayment) will offset the penalty for late filing, during the period that the penalties run concurrently.
5.4 Filing status
There are five filing statuses in the US; single, married filing jointly, married filing separately, head of household, and qualifying widow or widower. In Canada, couples file their own separate returns, in the US married couples can, and typically do, file a joint return where both spouses report all of their income and deductions on a single return. Married couples may choose to file separately, but not as singles.
Note: As of this writing, six states recognized same-sex marriages. Marriage licenses are granted by these six states: Connecticut, Iowa, Massachusetts, New Hampshire, New York, and Vermont, plus Washington, DC and Oregon’s Coquille and Washington’s Suquamish Indian tribes. Common-law marriages are allowed in the following states plus the District of Columbia: Alabama, Colorado, Iowa, Kansas, Montana, New Hampshire, Oklahoma, Rhode Island, South Carolina, Texas, and Utah. As mentioned previously, the IRS will recognize common-law marriages, and will allow the couple to file as married filing jointly. In addition to the states listed, couples from other countries that recognize common-law marriages, such as Canada, will also be recognized by the IRS.
While it is usually beneficial for married couples to file jointly, there can be circumstances where filing separately might be beneficial. The most common situation in which a couple might consider filing separately is when one spouse has many more deductible expenses than the other spouse, such as medical expenses where the deduction is limited to the amount that exceeds 7.5 percent of income.
For example, assume in this very simplistic example that Jane has income of $100,000 and her husband Bob has income of $30,000. Bob also had $10,000 of medical expenses, whereas Jane had no medical expenses. If Jane and Bob were to file jointly, they would have $130,000 of income and their medical expenses would be limited to $250, the amount above 7.5 percent of $130,000 (130,000 x 7.5% = 9,750). In other words, the first $9,750 would not be deductible. On the other hand, if they filed separately, Bob would be allowed to deduct $7,750, as only $2,250 would not be allowed (30,000 x 7.5% = 2,250).
6. Notifying the IRS about Your Change of Address
The IRS will send all correspondence to your last known address; this includes any claims of refund or deficiency notices. Keeping the IRS up to date on how to contact you is important because your refund may be delayed otherwise. If you owe the IRS money, simply changing your address and not telling the IRS does not help; the IRS can enforce a deficiency even if you never received the notice, as long as the IRS sent it to your last known address.
To update your address, you can call the IRS at 1-800-829-1040 or by filing a Change of Address (Form 8822), or by correcting the address on an IRS correspondence and returning it with the correct information. We recommend filing the form rather than calling since the 800 number above is the general number and you will be on hold for a very long time. When filing Form 8822, we recommend that you send it by registered mail so that you have proof it was sent and received.
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Your First Year in the US
Your first year in the US will be full of questions about everything from how do I get to where I am going and where can I go to watch a hockey game, to when are US taxes due and what is deductible for US tax purposes? While we can’t help you with the first two questions (though if you are ever in one of the cities where we have an office, we would be happy to share a hockey game with you), we will address most of your tax questions in this book. In this chapter, we will address topics such as when you become liable for US taxes, how you get a tax ID number, and identify some of the special rules that apply only in the first year.
1. Determining US Residency
A foreign national is anyone that is not a US citizen. A foreign national is presumed to be a nonresident alien, unless he or she passes one of the following two tests of being a resident alien:
1. Lawful Permanent Resident Alien card (i.e., Green Card)
2. Substantial Presence Test, which means the person must be physically present in the US for at least —
• 31 days during the current year, and
• a total of 183 days over the last three years where —
• all of the days in the current year, plus
• one-third of the days in the preceding year, plus
• one-sixth of the days in the second preceding year.
There is also the closer connection exception, which means the person can avoid resident alien status if the taxpayer —
• was in the US less than 183 days during the tax year,
• has a tax home in another country,
• holds himself or herself as a resident of that country, and
• files IRS Closer Connection Exception Statement for Aliens (Form 8840).
Form 8840 is designed to gather information so that the IRS can determine where the taxpayer resides. The form asks the following types of questions:
• Where is your family located?
• Where are your automobiles located?
• Where are your automobiles registered?
• Where is your personal belongings (e.g., furniture) located?
• Where are your social, cultural, and religious organizations located?
• Where are the banks with which you conduct your everyday business?
• Where is your driver’s license issued?
• Where are you registered to vote?
• From what country did you receive the majority of your income?
If you are a green card holder, you will be taxed as a US citizen in most respects. If you are out of the country when the card is issued, residency begins the moment you enter the US. If you leave the US, but keep your