Citizens Living Abroad: Canadian and U.S. Tax Issues

Citizens Living Abroad: Canadian and U.S. Tax Issues

• Canadian & U.S. Tax Issues
• Exchange Rate
• Foreign Income & Foreign Income Exclusion
• Nonresident Alien – General
• Nonresident Alien – Tax Withholding
• Nonresident Alien – Students
• U.S. Citizens Overseas
• Other

2.1 Aliens and U.S. Citizens Living Abroad: Canadian & U.S. Tax Issues

I am a U.S. citizen. If I move to Canada to live and work there as a Canadian permanent resident, do I pay both U.S. and Canadian Taxes?

United States citizens living abroad are required to file annual U.S. income tax returns and report their worldwide income if they meet the minimum income filing requirements for their filing status and age. You must contact the Canadian Government to determine whether you must file a Canadian tax return and pay Canadian taxes. For the United States income tax return, you will have several options available to you regarding claiming a foreign tax credit or excluding some or all of your foreign earned income.

References:

Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad

Publication 514, Foreign Tax Credit for Individuals

Publication 597, Information on the United States-Canada Income Tax Treaty

I am a Canadian citizen living and working in the U.S. for a U.S. employer on a visa. Do I need to file both a U.S. tax return and a Canadian tax return?

You must comply with both U.S. and Canadian filing requirements, if any. In the United States, you generally are required to file a return if you have income from the performance of personal services within the United States. However, under certain circumstances, that income may be exempt from payment of U.S. tax pursuant to the U.S.-Canada income tax treaty. You need to determine what type of visa you have, and how that impacts your residency status in the United States. If, based on the tax code and your visa status you are treated as a U.S. resident, then your entitlement to treaty benefits will be impacted. You must contact the Canadian government to determine whether you must file a Canadian tax return and pay Canadian taxes.

References:

• Publication 519, U.S. Tax Guide for Aliens

• Publication 597, Information on the United States-Canada Income Tax Treaty

• Publication 901, U.S. Tax Treaties

Are the Canada Pension Plan and Canadian Old Age Security Benefits taxable? If they are, please tell me where they should be entered on Form 1040.

Benefits paid under the Canada Pension Plan (CPP), Quebec Pension Plan (QPP), and Old Age Security (OAS) program to a U.S. resident are taxable, if at all, only in the United States. According to the U.S. – Canada income tax treaty, taxation of these benefits is based on residence. U.S. citizens or green card holders who reside in Canada are not subject to U.S. tax on this income.

These Canadian benefits are treated as U.S. social security benefits for U.S. tax purposes. Thus, under section 86 of the Internal Revenue Code, the portion of the benefits that is taxable will depend on your income and filing status. If your modified adjusted gross income is above certain limits, a maximum of 85% of your benefits will be subject to U.S. tax. Refer to Tax Topic 423 for information about determining the taxable amount of your benefits. Any benefit under the social security legislation of Canada that would not be subject to Canadian tax if paid to a resident of Canada is not subject to U.S. tax.

Canadian benefits that are treated as U.S. social security benefits are reported on Form 1040 (PDF) , U. S. Individual Income Tax Return or Form 1040AA (PDF).

References:

• Publication 519, U.S. Tax Guide for Aliens

• Publication 597, Information on the United States-Canada Income Tax Treaty

• Publication 915, Social Security and Equivalent Railroad Retirement Benefits

• Tax Topic 423, Social Security and Equivalent Railroad Retirement Benefits

2.2 Aliens and U.S. Citizens Living Abroad: Exchange Rate
Is there an Internet site with the exchange rates to convert foreign currencies to American dollars?

You can obtain currency exchange rates at the Federal Reserve Board web sites.

References:

• Federal Reserve Board

2.3 Aliens and U.S. Citizens Living Abroad: Foreign Income & Foreign Income Exclusion
What is foreign earned income? Is it income from a foreign source or income paid by a U.S. company while living abroad?

Earned income is pay for personal services performed, such as wages, salaries, or professional fees. Foreign earned income is income you receive for services you perform in a foreign country during a period when your tax home is in a foreign country and during which time you meet either the bona fide residence test or the physical presence test. It does not matter whether earned income is paid by a U.S. employer or a foreign employer. Foreign earned income does not include the following amounts.

• The previously excluded value of meals and lodging furnished for the convenience of your employer.

• Pension or annuity payments including social security benefits.

• Payments by the U.S. Government, or any U.S. government agency or instrumentality, to its employees.

• Amounts included in your income because of your employer’s contributions to a nonexempt employee trust or to a nonqualifying annuity contract.

• Recaptured unallowable moving expenses

• Payments received after the end of the tax year following the tax year in which you performed the services that earned the income.

References:

• Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad

• Publication 514, Foreign Tax Credit for Individuals

• Form 2555 (PDF), Foreign Earned Income

• Form 2555EZ (PDF), Foreign Earned Income Exclusion

• Form 1116 (PDF), Foreign Tax Credit

• Tax Topic 853, Foreign Earned Income Exclusion – General

Do I have to meet the 330-day presence test or have a valid working resident visa to meet the requirement for foreign income exclusion?

To claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, you must have foreign earned income, your tax home must be in a foreign country, and you must be one of the following:

• A U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year,

• A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty with a nondiscrimination article in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, or

• A U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.

U.S. tax law does not specifically require a foreign resident visa or work visa for this purpose, but you (must/should) comply with the other country’s laws.

References:

• Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad

• Publication 514, Foreign Tax Credit for Individuals

• Form 2555 (PDF), Foreign Earned Income

• Form 2555EZ (PDF), Foreign Earned Income Exclusion

• Form 1116 (PDF), Foreign Tax Credit

• Tax Topic 853, Foreign Earned Income Exclusion – General

I am a nonresident alien. Can I take the foreign earned income exclusion if I meet the bona fide resident test or physical presence test? If yes, what is the tax form used for nonresident taxpayer?

No, nonresident aliens do not qualify for the foreign earned income exclusion. Only if you are a U.S. citizen or a resident alien of the United States and live abroad, may you qualify to exclude a specific amount of your foreign earned income. Refer to chapter 4 of Publication 54 Tax Guides for U.S. Citizens and Resident Aliens Abroad, for limitation that apply. If you are the nonresident alien spouse of a U.S. citizen or resident alien, you can elect to be treated as a U.S. resident in order to file a joint return. In this case, you can take the foreign earned income exclusion if otherwise qualified. Refer to Publication 519, U.S. Tax Guide for Aliens, for detailed instructions on how to make this election.

However, nonresident aliens would be able to exclude their foreign earned income under the dual-status rules. Refer to Tax Topic 852 for dual-status information. A nonresident alien is generally not subject to U.S. tax on compensation for services performed outside the U.S.

References:

• Publication 519, U.S. Tax Guide for Aliens

• Tax Topic 853, Foreign Earned Income Exclusion – General

2.4 Aliens and U.S. Citizens Living Abroad: Nonresident Alien – General
I live in a foreign country. How do I get a social security number for my dependent who qualifies for a social security card?

Use Form SS-5-FS which may be obtained from the Social Security Administration.

References:

• Social Security Administration.

My spouse is a nonresident alien. How can I get a nonworking social security number for her?

Each foreign person who does not have and cannot obtain a social security number must use an IRS Individual Taxpayer Identification Number (ITIN) on any U.S. tax return or refund claim filed. For additional information on ITINs click on Individual Taxpayer Identification Number.

References:

• Publication 1915 (PDF), Understanding Your IRS Individual Taxpayer Identification Number

• Publication 519, U.S. Tax Guide for Aliens

• Form W-7 (PDF), Application for IRS Individual Taxpayer Identification Number

• Tax Topic 851, Resident and Non-Resident Aliens

• Tax Topic 852, Dual Status Aliens

2.5 Aliens and U.S. Citizens Living Abroad: Nonresident Alien – Tax Withholding
Under my visa as a temporary nonresident alien, I’m not subject to social security and Medicare withholding. My employer withheld the taxes from my pay. What should I do to get a refund of my social security and Medicare?

If social security tax and Medicare were withheld in error from pay received which was not subject to the taxes, you must first contact the employer who withheld the taxes for reimbursement. If you are unable to get a refund from the employer, file a claim for refund with the Internal Revenue Service on Form 843 (PDF), Claim for Refund and Request for Abatement.

You must attach the following to your claim:

• a copy of your Form W-2 (PDF), Wage and Tax Statement, to prove the amount of tax withheld;

• Form I-797, INS Approval Notice, is needed if you have changed your status from F-1 or J-1 to another status prior to filing the claim;

• if your visa status changed during the tax year you should attach copies of the pay stubs that cover the period of exemption from social security taxes;

• a copy of INS Form I-94, Arrival/Departure Record, if you are still in the United States;

• a copy of your valid entry visa;

• Form 8316 (PDF) , Information Regarding Request for Refund of Social Security Tax , or a signed statement stating that you have requested a refund from the employer and have not been able to obtain one; and

• a copy of Form 1040NR (PDF) , US Nonresident Alien Income Tax Return (or Form 1040NR-EZ (PDF)), for tax the year in question. Processing of your claim may be delayed if you submit it less than six weeks after you filed Form 1040NR or 1040NR-EZ.

In addition to the documentation listed above foreign student visa holders should also attach the following:

• a copy of Form I-20, Certificate of Eligibility, endorsed by your student advisor and stamped by the Bureau of Citizenship and Immigration Services; and

• a copy of the Employment Authorization Document of your Optional Practical Training (e.g., Form I-766, I-538 or 688B).

• if you are an exchange visitor, attach a copy of Form IAP-66 or DS-2019 to your claim.

File the claim, with attachments, with the IRS where the employer’s returns were filed. If you do not know where the employer’s returns were filed, send your claim to the Internal Revenue Service Center, Philadelphia, PA 19255.

For more information, refer to Chapter 8 of Publication 519, U.S. Tax Guide for Aliens .

References:

• Form 843 (PDF),Claim for Refund and Request for Abatement

• Publication 519, U.S. Tax Guide for Aliens

2.6 Aliens and U.S. Citizens Living Abroad: Nonresident Alien – Students
Are nonresident alien students, with F-1 or J-1 visas and employed by a U.S. company during the summer, required to have federal income taxes withheld from their paychecks?

The following discussion generally applies only to nonresident aliens. Wages and other compensation paid to a nonresident alien for services performed as an employee are usually subject to graduated withholding at the same rates as resident aliens and U.S. citizens. Therefore, your compensation, unless it is specifically excluded from the term “wages” by law, or is exempt from tax by treaty, is subject to graduated withholding. Nonresident aliens must follow modified instructions when completing Form W-4 (PDF). Please refer to chapter 8 of Publication 519, U.S. Tax Guide for Aliens, for directions on completing Form W-4 (PDF), Employee’s Withholding Allowance Certificate.

References:

• Publication 519, U.S. Tax Guide for Aliens

• Publication 597, Information on the United States-Canada Income Tax Treaty

• Publication 515 (PDF) Withholding of Tax on Nonresident Aliens and Foreign Entities

• Form W-4 (PDF), Employees Withholding Allowance Certificate

2.7 Aliens and U.S. Citizens Living Abroad: U.S. Citizens Overseas
I am a U.S. citizen working abroad. Are my foreign earnings taxable?

A U.S. citizen or resident alien is generally subject to U.S. tax on total worldwide income. However, if you are a United States citizen or a resident alien who lives and works abroad, you may qualify to exclude all or part of your foreign earned income. For specific information, refer to Tax Topic 853, Foreign Earned Income Exclusion – General.

If you would like more information on who qualifies for the exclusion, refer to Tax Topic 854, Foreign Earned Income Exclusion – Who Qualifies. For more information on what type of income qualifies for the exclusion, refer to Tax Topic 855, Foreign Earned Income Exclusion – What Qualifies. You may also wish to refer to chapter 4 Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad, for a detailed discussion.

If the information you need relating to this topic is not addressed in Publication 54, you may call the IRS International Tax Law hotline. The number is (215) 516-2000. This is not a toll-free number.

References:

• Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad

• Tax Topic 853, Foreign Earned Income Exclusion – General

• Tax Topic 854, Foreign Earned Income Exclusion – Who Qualifies

• Tax Topic 855, Foreign Earned Income Exclusion – What Qualifies

I am a U.S. citizen working for a U.S. firm in a foreign country. Is any part of my wages or expenses tax deductible?

U.S. citizens are taxed on their worldwide income, no matter where they work. Some taxpayers may qualify for the foreign earned income exclusion, foreign housing exclusion, or foreign housing deduction, if their tax home is in a foreign country and they are either a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, or are physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months. If the taxpayer is temporarily away from his or her tax home in the United States on business (less than a year), the taxpayer may qualify to deduct away from home expenses (for travel, meals, and lodging ) but would not qualify for the foreign earned income exclusion.

References:

• Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad

• Publication 514, Foreign Tax Credit for Individuals

• Publication 463, Travel, Entertainment, Gift and Car Expenses

• Form 2555 (PDF), Foreign Earned Income

• Form 2555EZ (PDF), Foreign Earned Income Exclusion

• Form 1116 (PDF), Foreign Tax Credit

• Tax Topic 514, Employee Business Expenses

I am a U.S. citizen living and working overseas. Can I have a tax credit on my U.S. taxes for the taxes I pay to the foreign country?

The foreign tax credit is intended to relieve U.S. taxpayers of the double tax burden when their foreign source income is taxed by both the United States and the foreign country from which the income is derived.

Generally, only income taxes paid or accrued to a foreign country or a U.S. possession qualify for the foreign tax credit. You can choose to take the amount of any qualified foreign taxes paid or accrued during the year as a foreign tax credit or as an itemized deduction.

To choose the foreign tax credit you must generally complete Form 1116 (PDF), Foreign Tax Credit and attach it to your Form 1040 (PDF). You may claim credit without attaching Form 1116 if all of your foreign source income is passive income (such as interest and dividends) reported to you on a payee statement and the total amount of qualifying foreign taxes you paid or accrued is not more than $300 ($600 in the case of a joint return) and is also reported to you on a payee statement. To choose the deduction, you must itemize deductions on Form 1040, Schedule A (PDF).

You may not take either a credit or a deduction for taxes paid or accrued on the income you exclude under the foreign earned income exclusion or the foreign housing exclusion. There is no double taxation in this situation because the income is not subject to U.S. tax.

References:

• Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad

• Publication 514, Foreign Tax Credit for Individuals

• Form 1116 (PDF), Foreign Tax Credit

• Tax Topic 856, Foreign Tax Credit

2.8 Aliens and U.S. Citizens Living Abroad: Other
How do I know if the U.S. has an income tax treaty with another country?

Publication 901, U.S. Tax Treaties , has information regarding United States tax treaties.

You can also locate the complete text of most current treaties at Income Tax Treaties or use our search engine with keywords “income tax treaties.”

References:

• Publication 901, U.S. Tax Treaties

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