You must file a US Federal personal (1040 or 1040NR) or Business/Corporate returns and one or more state and local tax returns (if applicable) if one or combination of the following situations apply to you:
- You are a US citizen or Green Card holder.
- You have US source income (employment or investment)
- You own property in the United States
- You worked in the US as a co-op student.
- Other situations may apply. Please call Fairtax Business Services
For more information also see Canada-United States (US ) cross-border taxation
U.S. citizens, Green card holders or residents are taxed on their worldwide income from all sources, both inside and outside of the United States. Form 1040 for U.S. personal Income Tax Return must be filed with the Internal Revenue Service (IRS), each year by April 15, for the previous year. 1040 personal income tax return may be filed either by an individual as separate, or in case of married couples as a joint return. Depending on your circumstances you may be eligible to file as single, married filing jointly, married filing separately, qualifying widow(er), or as head of household. Generally, it is better for a U.S. citizen living anywhere in the world to file a return regardless of their level of income. An application may be submitted to IRS asking for a six months extension of the filing deadline to October 15. Further extensions may be available in certain circumstances. All taxes owed must be paid by April 15th anyways, otherwise interest and penalty may apply. U.S. citizens, Green Card holders (or permanent residents) living outside the U.S. who have no U.S. source salary or wages income have an automatic two months extension of time (until June 15 each year) to file their returns and pay taxes, without filing an extension.
Additional forms must be filed with the 1040 personal return. form 5471 for holdings of controlled foreign corporations. Foreign grantor trusts such as Canadian Tax Free Savings Accounts (TFSA) and Registered Education Savings Plans (RESP’s) must apply for an employer identification number (EIN) and file form 3520 and 3520A forms by March 15th deadline unless the six month extension to September 15 is applied for before the initial due date.
1040 filers are also required to report foreign financial assets on U.S. Treasury form TDF 90.22.1(by June 30 – no extensions) and form 8938, which is filed with the 1040 return. See our FBAR page for more information.
(A). Types of Income
1- Gross Income
Unless specifically excluded by Internal Revenue Code (IRS), gross income includes any income from any source, including (but not limited to) the following items:
- Payments for services, including fees, commissions, fringe benefits, and similar items.
- Business income.
- Gains derived from property transactions such stocks, real estate.
- Rental income.
- Alimony and separate maintenance payments.
- Income from life insurance and endowment contracts.
- Income from discharge of indebtedness.
- Distributive share of partnership gross income.
- Income in respect of a decedent.
- Income from an interest in an estate or trust.
- Unemployment compensation.
- Prize received in a draw (church or any other organization).
- Fair market value of an economic benefit (such as a free trip).
- Punitive damages.
Capital gain/loss, depreciation, amortization, recapture:
(gains/loss, sale of personal residence, Alternative Minimum Tax or AMT)
Capital asset, is almost everything a person owns and uses for personal or investment purposes. Examples include a home used a personal residence or for producing income, personal use items such as household furnishings, and stocks or bonds. When a capital asset is sold, the difference between the adjusted cost basis (ACB) in the asset and the amount it is sold for is a capital gain or a capital loss. Most of the time, an asset’s basis is its original cost. Capital gain is realized if a person sells the asset for more than the basis. The person has a capital loss if the asset is sold for less than the basis. Losses from the sale of personal-use property, such as a home or car, are not deductible against income from other sources .
Sales and Other Dispositions of Capital Assets. Form 8949 – Sales and Other Dispositions of Capital Assets is a relatively new form. Many transactions that, in previous years, would have been reported by corporations and partnerships on Schedule D (Form 1040) must now be reported on Form 8949. Old Schedule D-1 is replaced by form 8949 which is used to:
- The sale or exchange of a capital asset not reported on another form or schedule.
- Gains from involuntary conversions (other than from casualty or theft) of capital assets not held for business or profit.
- Non-business bad debts.
Corporations and partnerships also use Form 8949 to report:
- The sale or exchange of a capital asset not reported on another form or schedule.
- Non-business bad debts.
- Undistributed long-term capital gains from Form 2439 – Notice to Shareholder of Undistributed Long-Term Capital Gains.
Electing large partnerships and corporations also use Form 8949 to report their share of gain or (loss) from a partnership, S corporation, estate or trust.
Schedule D, use it for:
- To figure the overall gain or loss from transactions reported on Form 8949.
- To report a gain from Form 2439 or 6252 or Part I of Form 4797.
- To report a gain or loss from Form 4684, 6781, or 8824.
- To report a gain or loss from a partnership, S corporation, estate or trust.
- To report capital gain distributions not reported directly on Form 1040, line 13 (or effectively connected capital gain distributions not reported directly on Form 1040NR, line 14).
- To report a capital loss carryover from last year to current tax year.
Use Form 4797 – Sales of Business Property to report the following:
- The sale or exchange of:
- a- Property used in a trade or business.
- b- Depreciable and amortizable property.
- c- Oil, gas, geothermal, or other mineral property.
- d- Section 126 property.
- The involuntary conversion (other than from casualty or theft) of property used in a trade or business and capital assets held for business or profit.
- The disposition of non-capital assets other than inventory or property held primarily for sale to customers in the ordinary course of a trade or business.
- The disposition of capital assets not reported on Schedule D.
- The gain or loss (including any related recapture) for partners and S corporation shareholders from certain section 179 property dispositions by partnerships (other than electing large partnerships) and S corporations.
- The computation of recapture amounts under sections 179 and 280F(b)(2) when the business use of section 179 or listed property decreases to 50% or less.
- Gains or losses treated as ordinary gains or losses, if the taxpayer is a trader in securities or commodities and made a mark-to-market election under Internal Revenue Code section 475(f).
Use Form 4684 – Casualties and Thefts to report involuntary conversions of property due to casualty or theft.
Use Form 6781 – Gains and Losses From Section 1256 Contracts and Straddles to report any gain or loss on Section 1256 contracts under the market-to-market rules and gains and losses under Section 1092 from straddle positions.
A Section 1256 contract is any: (173)
- Regulated futures contract.
- Foreign currency contract.
- Non-equity option.
- Dealer equity option.
- Dealer securities futures contract.
A Section 1256 contract does not include any interest rate swap, currency swap, basis swap, commodity swap, equity swap, equity index swap, credit default swap, interest rate cap, interest rate floor, or similar agreement.
Use Parts I, II, and III of Form 8824 – Like-Kind Exchanges to report each exchange of business or investment property for property of a like kind. Certain members of the executive branch of the Federal Government and judicial officers of the Federal Government use Part IV to elect to defer gain on conflict-of-interest sales. Judicial officers of the Federal Government are the following: (174)
- Chief Justice of the United States.
- Associate Justices of the Supreme Court.
Judges of the:
- United States courts of appeals.
- United States district courts, including the district courts in Guam, the Northern Mariana Islands, and the Virgin Islands.
- Court of Appeals for the Federal Circuit.
- Court of International Trade.
- Tax Court.
- Court of Federal Claims.
- Court of Appeals for Veterans Claims.
- United States Court of Appeals for the Armed Forces.
- Any court created by Act of Congress, the judges of which are entitled to hold office during good behavior.
See the instructions for the Schedule D the taxpayer is filing for detailed information about the following: (171)
- Other forms he or she may have to file.
- The definition of capital asset.
- Reporting capital gain distributions, undistributed capital gains, the sale of a main home, the sale of capital assets held for personal use, or the sale of a partnership interest.
- Capital losses, non-deductible losses, and losses from wash sales.
- Traders in securities.
- Short sales.
- Gain or loss from options.
- Installment sales.
- Demutualization of life insurance companies.
- Exclusion or rollover of gain from the sale of qualified small business stock.
- Any other rollover of gain, such as gain from the sale of publicly traded securities.
- Exclusion of gain from the sale of DC Zone assets or qualified community assets.
- Certain other items that get special treatment.
- Special reporting rules for corporations and partnerships in certain situations.
Basis and adjusted cost basis (ACB)
Basis is the accumulated amount of investment in the property for tax purposes. The basis of property the taxpayer buys is usually its cost. The cost is the amount he or she pays for it in cash, in debt obligation, in other property, or in services. The cost also includes:
- Sales tax charged on the purchase.
- Freight charges to obtain the property.
- Installation and testing charges.
If the taxpayer buys real property, such as a building and land, certain fees and other expenses he or she pays are part of the cost basis in the property. If the taxpayer agrees to pay real estate taxes on a property that were owed by the seller and the seller does not reimburse him or her, the taxes he or she pays are treated as part of the basis in the property. The taxpayer cannot deduct them as taxes paid.
If the taxpayer reimburses the seller for real estate taxes the seller paid for him or her, the taxpayer can usually deduct that amount. Do not include that amount in the basis in the property.
The following settlement fees and closing costs for buying the property are part of the basis in the property: (60)
- Abstract fees.
- Charges for installing utility services.
- Legal fees.
- Recording fees.
- Transfer taxes.
- Title insurance.
– Any amounts the seller owes that the taxpayer agrees to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions.
The following are settlement fees and closing costs a taxpayer cannot include in the basis in the property: (60)
– Fire insurance premiums.
– Rent or other charges relating to occupancy of the property before closing.
– Charges connected with getting or refinancing a loan, such as:
a) Points (discount points, loan origination fees),
b) Mortgage insurance premiums,
c) Loan assumption fees,
d) Cost of a credit report, and
e) Fees for an appraisal required by a lender.
Also, do not include amounts placed in escrow for the future payment of items such as taxes and insurance.
2- Adjustments to Gross Income: major items, allowed by IRS to be subtracted from gross income, some limitations may apply:
– Certain business expenses of reservists, performing artists, and fee-basis government officials.
– Archer MSA and health savings account deduction.
– Moving expenses.
– One-half of self-employment tax.
– Self-employed SEP, SIMPLE, and qualified plans.
– Self-employed health insurance deduction.
– Penalty on early withdrawal of savings.
– Alimony paid.
– IRA deduction.
– Student loan interest deduction.
– No-punitive damages awarded for personal injuries involving physical injury or physical sickness.
Adjusted Gross Income (AGI) is used for calculating deductions, tax credits, and other tax benefits that are based on or limited by income. Medical expenses, donations, casualty losses and miscellaneous itemized deductions are all computed based on or are limited by the amount of adjusted gross income.
3- Deductions from AGI:
Some expenses of a personal nature are allowed to be deducted which are divided into five categories:
1. Certain Medical and Dental Expenses.
2. Interest and taxes paid on the home.
3. Charitable donations.
4. Casualty and Theft Losses.
5. Job Expenses and Certain Miscellaneous Deductions, including union dues, tax preparation fees, safe deposit box fees, and non-reimbursed employee business expenses.
B. Standard and Itemized Deductions:
There two types deductions 1040 fillers can claim
(i) Standard deduction, calculated automatically based on filling statues.
(ii) Or itemize deductions- Itemized deductions include:
-Medical expenses (less a % of Adjusted Gross Income – AGI), state and local taxes, charitable contributions, investment expenses, and miscellaneous deductions such as non-reimbursed employee expenses (less a % of AGI) subject to AGI maximum threshold level, being phased out completely once AGI reaches a certain level. IRS changes the threshold and applicable percentages each years.
C- Personal Exemption
This is some minimal amount recognized by congress needed by everyone for the basic necessities of life and therefore, excluded from taxation. For tax year 2015 it has been set as equal to $4,000 for each eligible person including tax payer, spouse and all eligible dependents.
2015 personal exemptions:
– $4,000 for the taxpayer, unless a dependent of another.
– $4,000 for the taxpayer’s spouse.
– $4,000 for each eligible dependent.
What is New:
1- Beginning in 2015 taxable year, the personal exemption will start to phase out for taxpayers with adjusted gross income (AGI) above certain amounts.
|For taxable years beginning in 2015, the personal exemption phases out for taxpayers with the following adjusted gross income (AGI) amounts:|
|Filing Status||Beginning Phase-out AGI||Completed Phase-out AGI|
|– Married Filing Jointly, Surviving Spouses||$309,900||$432,400|
|– Head of Household||$284,050||$406,550|
|– Single (other than Surviving Spouses and Heads of Households||$258,250||$380,750|
|– Married Filing Separately||$154,950||$216,200|
2- Net Investment Income Tax
A new Net Investment Income Tax (NIIT) of 3.8% will be applied on investment income in excess of the following filing thresholds. NIIT be reported on form 8960 and will affect U.S. citizens and residents only:
– Single, where income exceeds 200,000.
– Married filing jointly, 250,000.
– Married filing separately, 125,000
– Qualified widow(er) with dependent child, 250,000
Net investment income will include gains from property held for investment, such as stocks, bonds, mutual funds, etc., including gains on the sale of a principal residence in excess of the exemption amount, less expenses related to investments. For NIIT purposes, net losses from property dispositions cannot be less than zero (and therefore cannot offset other investment income), and are not available for carry forward to future periods.
New Medicare Tax on Earned Income
New form 8959, will be used to report the new Medicare tax of 0.9% of earned income in excess of the same income thresholds as for NIIT. In principle, employers must withhold the extra tax from wages exceeding $200,000 per year. Difficulty may arise with employees with multiple separate jobs, or spouse’s income on a joint return.
Any one carrying business as a sole proprietor (unincorporated) in the United States is subject to income tax on his/her gross income less allowable deductions related to that income. A separate Schedule C must be filed the income tax return for each business. IRS uses strict and complex guidelines on how to calculate amount of investment “at risk”, level of actual participation in the enterprise, and the nature of the business to determine the degree of and the timing of the deduction of expenses and losses from self employment small business activities.
Self-employment income is subject to the Self Employment Tax, which for tax year 2015,is equal to 15.3% the first $113,700 and 2.9% thereafter, and is on top of regular income taxes payable. The Self Employment Tax is the equivalent Canada Pension Plan contributions on self-employment . 50% of this tax is deductible from taxable income.
(III) Partnerships, Rental Income, Trust and Royalty Income
In addition to reporting each individual’s partnership income on Schedule E of his or her1040 return; all partnerships operating in the U.S. must also file a separate form 1065 tax return annually. The partnership uses form K-1 to report allocation of its income, expenses and other items to partners.
Rental and royalty income are also reported on Schedule E. U.S. residents who declare rental income on their Schedule E from sources outside United Sates including Canada, must follow U.S. guidelines in determining their income and expenses. In many cases the US rules can be significantly different from those used in Canada and in other courtiers.
Losses from real estate rentals can generally be deducted against other income in Canada. In Canada capital cost allowance CCA cannot be used to generate or increase a loss from real estate operations. In the U.S., depreciation may be used to show loss. In fact, depreciation calculations are compulsory , but availability of the losses to be used as deduction, may be limited or deferred by the “passive activity loss” rules.
A corporation carrying on business in the U.S. must file corporate income tax return each fiscal year. Corporate taxes must be filed whether the company has been incorporated in the U.S. or outside United States. Form 1120 and its variations are used depending on whether the company is a Limited Liability entity (LLC), an S corporation or other type of registered business.
Every individual who files a U.S. tax return must enter their tax identification number in their income tax return. Such numbers are issued the Social Security Administration office and verified by the IRS. For U.S. residents, citizens, and work permit visa holders, a Social Security Number (SSN) is required, and can be obtained by completing form SS-5 (Social Security Card application). Spouses, children and other eligible non-resident dependents being claimed as dependents on a U.S. tax return but not permitted to work in the U.S., an Individual Taxpayer Identification Number (ITIN) must be applied for. An ITIN number can be requested by completing form W-7 (Application for IRS Individual Taxpayer Identification Number). Original certified copy of a passport, issued by the home country passport office must be attached to all W-7 applications. Tax forms which do not have the appropriate identification numbers or form W-7 and supporting documents attached, will be rejected by the IRS, and claims for dependents without proper ITIN numbers will not be allowed. .
EIN is equivalent to the Canadian BIN number. Form SS-4 is used by Partnerships, corporations and self employed persons to request an EIN number.
(V) State Taxes
Several U.S. states have their own income tax administration for imposing state income tax to state residents or those with income from within the state or corporations, partnerships doing business in that state. Income tax laws, rates, methods of taxation, rules of computation and filing requirements vary from state to state and from entity to entity. Some states do not recognize foreign tax credits for taxes paid to foreign countries or international jurisdictions.