Tax Tips and Pits: U.S. citizens living abroad must file

“I’m an American citizen and have been living and working in Canada for years. I hear I have to file a U.S. tax return. Is this true?”

“I’m an American citizen and have been living and working in Canada for years.  I hear I have to file a U.S. tax return.  Is this true?”

This question is being asked more and more, and the answer is, “yes”.

Unlike Canada’s tax policy that is based on residency, in other words if you live in Canada you file a Canadian tax return regardless of your citizenship, U.S. tax policy is based on citizenship.

If you are an American citizen, have dual American citizenship, or hold an American “green card” and live outside of the U.S., you likely have to file a U.S. tax return.  And yes, even if you have never lived or worked in the U.S., you may still have to file in the U.S..

The trigger for having the obligation to file in the U.S. centers around income received.  The list is exhaustive and includes wages, commissions, interest, dividends, capital gains, royalties, business, farm and rental income, social security, even spousal support and inheritance.  And these can come from anywhere in the world, not just the U.S..

If you have somehow escaped receiving any of these sources of income, you still may have to file if you are married to an American citizen who received income identified above.

It’s about this point in the conversation that the question becomes, “Is there any way to be excused from filing in the U.S.?”

Yes there is and it is based on threshold annual incomes determined by marital status and age.  They range from $3,950 to $21,500.  In other words, given your life situation, if you don’t exceed the applicable income threshold, you don’t have to file a U.S. return.

For those who have income and that income exceeds the threshold, the good news is you won’t be double taxed.

The tax treaty between the U.S. and Canada gives credit for taxes paid in Canada so in the end, no taxes may actually be payable in the U.S..

However, just because you don’t have taxes due in the U.S., doesn’t mean you are exempt from filing a U.S. return.  You still have to file in the U.S. to claim your income and to prove that as much tax has been paid in Canada as would have been paid in the U.S., a troublesome thought when it comes to inheritance and some types of capital gains like your principal residence – but these are topics for another day.

Finally, to be helpful to American citizens living abroad, the filing deadline of the U.S. tax return is extended from the normal April 15 date to June 15.  Given, Canada’s April 30 deadline, this extra time is handy.

Ron Clarke has his MBA and is a business owner in Trail, providing accounting and tax services.

Email him at ron.clarke@JBSbiz.ca. To read previous Tax Tips & Pits columns visit www.JBSbiz.netron.

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