US Citizen in Canada help please....

[kpangelinan]

Was wondering if some of you can point me in the right direction for this client and I have some ideas on what needs to be done, but some direction would be appreciated.

Was born a US Citizen with a valid SS # and left to Canada when she was a teenager, met and married a Canadian, but never gave up her US Citizenship. She has worked all of her life in Canada and has never filed a US Income Tax Return.

This person does not want to give up her US citizenship.

Thanks.

[Bees Knees]

TTB, page 14-14

Taxation of Worldwide Income
The following general rules apply to U.S. citizens and resident
aliens.
• Worldwide income from all sources is subject to federal income
tax, regardless of where the taxpayer is living.
• The same filing requirements apply whether the taxpayer is in
the United States or abroad.

TTB, page 14-15

The following exclusions and deductions may be available to
qualifying U.S. citizens and resident aliens in 2010.
• Exclusion from gross income up to $91,500 foreign earned
income.
• Exclusion from gross income of a limited amount of employer-
paid foreign housing expense that was reported as foreign
earned income.
• Deduction, taken as an adjustment to gross income, of a limited
amount of employee-paid foreign housing expense or foreign
housing expense paid by a self-employed taxpayer.
The exclusions and deduction are calculated on Form 2555, Foreign
Earned Income.

TTB, page 14-16

Form 2555, Foreign Earned Income. File Form 2555 to claim a
foreign earned income exclusion or housing allowance. Choosing
the exclusion must generally be made on one of the following.
• A timely-filed return (including any extensions),
• A return amending a timely-filed return, or
• A return filed within one year from the original due
date of the return (determined without regard for
any extensions).
The taxpayer can choose the exclusion on a return
filed after the periods described above if no federal
income tax is owed after taking into account the
exclusion.
If federal income tax is owed after taking into account the exclusion,
the taxpayer can choose the exclusion on a return filed after
the periods described above if the return is filed before the IRS
discovers that the taxpayer failed to take the exclusion. Type or
legibly print at the top of the first page of Form 1040, “Filed pursuant
to section 1.911-7(a)(2)(i)(D).”
If the exclusion was not claimed as described above, a private letter
ruling may be requested.

Thus, it appears to me if this person made less than $91,500 per year, there is no federal income tax due. Have her file Form 2555 under the above procedure for each year before IRS finds out she is a non-filer.

[Bees Knees]

One other point. I see nothing in the rules that prevents her from filing married filing separate and still qualify for the foreign earned income exclusion. Thus, if she files separate, none of her Canadian husband's income would be subject to U.S. tax.

[Bees Knees]

Another point: Even if she does have investment income that does not qualify for the foreign earned income exclusion, her standard deduction and personal exemption for MFS would offset at least $9,350 of it. It all depends on how much income we are talking about.

[Burke]

I have the same situation with a client as this taxpayer (or non-taxpayer if you will.) She has lived and worked in Canada for decades. She never filed in the US and she always made less than the Foreign Income Exclusion (FIE) amt. She probably just never thought about it, as I am sure she had no idea what the FIE was. Until she inherited a huge portfolio of investments from her parents. Now she files in the US every year but essentially only pays US income tax on the cap gains and int/div income that the portfolio earns, after itemized deductions (mainly charity). Her work earnings are excluded. The story in Canada is different. She pays whopping taxes there. I think she gets a credit for the US income tax paid, but there is no favorable tax rate in Canada on investments like we enjoy right now. The addl income pops her into an even higher bracket than she was in prior to inheritance.

[WhiteOleander]

Also, wouldn't she be eligible to claim a credit for foreign tax paid on 1116 if for some reason she was ineligible for the 2555?

[kpangelinan]

Another point: Even if she does have investment income that does not qualify for the foreign earned income exclusion, her standard deduction and personal exemption for MFS would offset at least $9,350 of it. It all depends on how much income we are talking about.

Thanks so much!!!!!! It's not that much investment income, so I think we're pretty safe.....

Also, wouldn't she be eligible to claim a credit for foreign tax paid on 1116 if for some reason she was ineligible for the 2555?

This is a good question and my initial thoughts (will have to research and see if anyone else posts on this) would be that credits would be against taxable income, right?

[kpangelinan]

So, then my next question is, do we go back FOREVER, or just the last 6 years?

[Burke]

If the end result is no tax due in the US for those years, I would not bother with past returns.

[kpangelinan]

If the end result is no tax due in the US for those years, I would not bother with past returns.

Also, are you saying to still file current year returns even if there is no tax due, or just never file if she doesn't owe each year.

If tax due, do we go back forever? 6 years (I've heard elsewhere)?

[okie1tax]

Canada

FBARS may be the issue

[kpangelinan]

FBARS may be the issue

Those too and am working on that as well......but what about 1040's?

[joanmcq]

FBARs are an issue, and the current program to avoid the huge penalties on not filing FBARS only applies if the income was properly reported on a US tax return. Therefore, if pre-inheritance she had over 10K in foreign accounts (and joint accounts and I believe RRSPs count towards this), she is going to have to file at least 6 years back.

At least with the RRSPs, they aren't considered foreign trusts anymore.

[Burke]

In my client's case, the parent's investment portfolio trust was in the US, and she let it stay here. It's all invested in US stocks & bonds and cash accts. Some years, she does not owe anything. Other years, she has a tax liability. Depends on capital gains, mostly. We file every year now whether she has one or not. Because of course, they send a 1099 to the IRS under her SSN, for one thing.

[kpangelinan]

I have the same situation with a client as this taxpayer (or non-taxpayer if you will.) She has lived and worked in Canada for decades. She never filed in the US and she always made less than the Foreign Income Exclusion (FIE) amt. She probably just never thought about it, as I am sure she had no idea what the FIE was. Until she inherited a huge portfolio of investments from her parents. Now she files in the US every year but essentially only pays US income tax on the cap gains and int/div income that the portfolio earns, after itemized deductions (mainly charity). Her work earnings are excluded. The story in Canada is different. She pays whopping taxes there. I think she gets a credit for the US income tax paid, but there is no favorable tax rate in Canada on investments like we enjoy right now. The addl income pops her into an even higher bracket than she was in prior to inheritance.

In this case with your client, does the exclusion of her work earnings apply if she was married and file jointly with her husband in Canada...I mean do they (for filing tax returns in the US, FIE) look at just her earnings or joint earnings?