Can Canadians be Accidental Americans? Do they Need to Pay U.S. Taxes?

Can Canadians be Accidental Americans? Do they Need to Pay U.S. Taxes?

At least some Canadians may be aware that the United States’ method of taxation is unique among all other developed nations. That is, U.S. individuals are generally taxed on the basis of their citizenship rather than on the basis of an economic nexus. Therefore, individuals with U.S. citizenship are typically liable for U.S. taxes on foreign income – even if they never set foot in the United States during the tax year. In many cases, taxpayers are aware that they will need to file U.S. taxes to leverage provisions of international tax treaties to reduce or eliminate potential double taxation. However, when a person does not realize that he or she has U.S. citizenship, the ingredients for a potentially serious tax mistake are present. In particularly egregious cases, the individual could face tens or hundreds of thousands of dollars in back taxes and penalties. If you are a resident of Canada or another nation and are concerned about U.S. taxes due to potential dual citizenship, Ted Kleinman and U.S. Tax Help may be able to assist. Are You a Canadian Citizen Who is also Accidentally American? As some Canadians may be aware, there are several ways that one can obtain U.S. citizenship. Most cases involving “accidental” Americans stem from citizenship through birth. That is, individuals who are born to a U.S. parent or have U.S. grandparents will also be a U.S. citizen at birth will also be U.S. citizens. Additionally, individuals who are born on U.S. soil receive citizenship at birth. Finally, if a parent became a naturalized U.S. citizen while a child was under the age of 18...
6 Important Income Tax Changes for Citizens Abroad in 2016

6 Important Income Tax Changes for Citizens Abroad in 2016

There’s a famous quote that says nothing is certain but death and taxes.  Yet while taxes may be certain, consistency in the tax code is not.  Whether you’re a citizen abroad or live on US soil, there are six significant changes you should know about when filing taxes in 2016.    2016 Tax Brackets, Tax Rates, and Changes to the Filing Deadline Several legislative updates may affect your taxes in 2016, including the filing deadline and alterations to tax rates and tax brackets (which increased by about 0.4% overall).  Make sure to keep the following updates in mind as you prepare to file:   New deadlines give taxpayers more time to file an income tax return.  The deadline to file taxes in 2016 is Monday, April 18, not the usual April 15 deadline.  The date was pushed back due to Emancipation Day, which happens to fall on April 15 this year.  If you’re a resident of Maine or Massachusetts, Patriot’s Day gives you even more additional time, bringing your deadline to Tuesday, April 19. Changes to tax rates and tax brackets.  Tax brackets and tax rates have changed from 2015 to 2016.  The 2016 rates and brackets are listed below:   Single Filers  $0 to $9,275 – 10% of taxable income $9,276 to $37,650 – $927.50 plus 15% of income above $9,275 $37,651 to $91,150 – $5,183.75 plus 25% of income above $37,650 $91,151 to $190,150 – $18,558.75 plus 28% of income above $91,150 $190,151 to $413,350 – $46,278.75 plus 33% of income above $190,150 $413,351 to $415,050 – $119,934.75 plus 35% of income above $413,350 $415,051 and above –...
Avoid These 3 Common Tax Mistakes Made by Expats

Avoid These 3 Common Tax Mistakes Made by Expats

The tax code isn’t exactly known for being easy to understand, especially when it comes to international taxation.  Unfortunately, its complexities often lead well-meaning taxpayers to make costly errors.  The good news is that these pitfalls are easy to avoid – if, that is, you know how to recognize them.  If you’re a US citizen abroad, be sure to steer clear of these three tax mistakes when filing your taxes for 2016.   #1: Failing to File a US Tax Return to Report Worldwide Income If you’re assuming the IRS won’t notice you because you “aren’t a big corporation” or “don’t have that much income,” think again.  You might have been correct 20 or 30 years ago; but over the past decade, the IRS has dramatically expanded both the scope and intensity of the scrutiny paid to offshore activities. Don’t be deceived: it is mandatory for Americans abroad, whose gross income meets the 2016 tax filing thresholds, to report worldwide income by filing a US income tax return with the IRS.  Your “worldwide income” includes all of the following: Foreign bank accounts Foreign securities accounts Income from: Capital gains Foreign trusts Gambling Retirement Salary Social security Wages Failure to report worldwide income can, at “best,” result in the imposition of hefty penalties.  In the worst-case scenario, where the IRS determines your failure to file was intentional, you could potentially be prosecuted by the Department of Justice. The bottom line?  Failing to file a tax return as an American abroad is one of the biggest tax mistakes you can make.  If you’re unclear or confused about your filing obligations, ignoring...
Owe Back Taxes to the IRS? The Government Could Take Away Your Passport

Owe Back Taxes to the IRS? The Government Could Take Away Your Passport

Are you planning on taking a trip overseas to escape the harsh winter weather?  Are you already a citizen abroad?  If you answered yes to either of those questions, now is the time to get caught up if you owe back taxes to the IRS.  Legislation passed by Congress in December, called the Fixing America’s Surface Transportation Act, or the FAST Act, gives the Department of State power to deny or revoke passports for Americans at home and abroad who owe the IRS more than $50,000 in back US taxes.   FAST Act Grants State Dept. Power to Revoke, Deny Passports if Tax Debt Exceeds $50,000 The idea of revoking or denying passports as a penalty for failure to pay taxes first began circulating in 2011, when the Government Accountability Office (GAO) released a federal tax collection report containing the following recommendation: “If Congress is interested in pursuing a policy of linking federal tax debt collection to passport issuance, it may consider taking steps to enable State to screen and prevent individuals who owe federal taxes from receiving passports.  This could include asking State and IRS to jointly study policy and practical issues and develop options with appropriate criteria and privacy safeguards.” The proposal sparked controversy then, just as it does now – only this time, the idea managed to find its way into law.  In 2015, the House voted 359 to 65 in favor of the FAST Act, while 60 votes were achieved in the Senate.  The bill was signed into law by President Barack Obama in December. The passport provision is easy to miss in the sprawling text...
How Does the IRS Decide if an FBAR Violation was Willful?

How Does the IRS Decide if an FBAR Violation was Willful?

If you’re a regular reader of our tax blog, you may already be familiar with the IRS FBAR requirement, or Report of Foreign Bank and Financial Accounts.  If this term is new to you, here’s a quick summary to get you caught up: all U.S. persons, including citizens, residents, and entities, must disclose foreign bank accounts whose aggregate value exceeded $10,000 at any time during the reporting year.  If you fail to report the account, you will face serious consequences.  However, the extent to which you will be penalized depends largely upon whether your violation was considered “willful” or “non-willful.” When is Failure to File an FBAR Considered Willful by the IRS? In Internal Revenue Manual (IRM) 4.26.16, the IRS formally differentiates between willful and non-willful FBAR violations.  Under Section 6.5.1 of the Manual, which addresses the criteria for willful violations, the IRS describes how “willfulness” is determined: “The test for willfulness is whether there was a voluntary, intentional violation of a known legal duty…  Willfulness is shown by the person’s knowledge of the reporting requirements and the person’s conscious choice not to comply with the requirements.” Based on this wording, one might suppose that ignorance of the FBAR requirement is sufficient to excuse any failure to file.  However, anticipating potential abuses of the willfulness definition, the IRS also defined a second type of willfulness known as “willful blindness,” which describes any “person who made a conscious effort to avoid learning about the FBAR reporting and recordkeeping requirements.”  Thus, if a taxpayer was unaware of his or her obligation to file an FBAR, they had better be prepared with...
IRS Now Recognizes Same-Sex Marriage In Every State

IRS Now Recognizes Same-Sex Marriage In Every State

On June 26, 2015, the United States Supreme Court ruled in a 5-4 decision that the Due Process and Equal Protection Clauses of the Fourteenth Amendment guaranteed the right to same-sex marriage. The landmark ruling, known as Obergefell v. Hodges, was a monumental victory for LGBT couples throughout the nation. With marriage comes equality – and, albeit less exciting, certain tax benefits as well. On October 21, the IRS issued a press release proposing new regulations which would impact a wide range of federal tax provisions for same-sex couples, including certain tax credits, exemptions, IRA contributions, and employee benefits. IRS Press Release: Married LGBT Couples to Be Recognized in All States for Tax Purposes Obergefell wasn’t the first US Supreme Court ruling to grant greater equality to LGBT Americans. Two years earlier, in United States v. Windsor, the Supreme Court struck down the Defense of Marriage Act (DOMA), which prevented the recognition of same-sex spouses, thus denying same-sex couples federal marriage benefits to which they would otherwise be entitled. As a result of Windsor, the IRS was required to recognize same-sex marriages, and thus began accepting joint returns from married same-sex couples – but only in states where same-sex marriages were legal. At the time, that excluded Arkansas, Georgia, Kentucky, Louisiana, Michigan, Mississippi, Missouri, Nebraska, North Dakota, Ohio, South Dakota, Tennessee, and Texas – states where gay marriage was still banned as of 2013. LGBT couples from states without same-sex marriage were consequently denied equal opportunities to file jointly, transfer property, and receive certain benefits. After Obergefell, which effectively legalized same-sex marriage throughout the United States, the IRS was...