Saturday, April 30, 2011

I am a Canadian citizen, but I am in the process of becoming a US citizen, too...

...As a dual citizen, who will I pay taxes to?

To resolve some of the complications its citizens create in moving back and forth, Canada and the US negotiated a Tax Treaty to prevent the double taxation of their citizens on the same income. As a result, the " Convention between the United States of America and Canada " (simply the Canada/US Tax Treaty) was negotiated and originally signed on September 26, 1980 . Since then, the Treaty has been revised four times - June 14, 1983 , March 28, 1984 , March 17, 1995 and July 29, 1997.

The Canada/US Tax Treaty "overrides" certain areas of the tax code in both Canada and the US to afford protection from, among other things, double taxation in both countries. An example may help. If you are residing in the US and you generate C$100 in Canadian interest from a bank account, Canada retains the right to tax this income as "Canadian source" income. However, as a US resident, you are required to declare your worldwide income on your US return, including the C$100 from Canada . Per the Canada/US Tax Treaty, the Revenue Agency takes a 10% withholding tax on the interest and the US taxes the interest at your ordinary income tax rate (assume 25% or U$25). In sum total, you have now paid more than C$35 (because of the US exchange rate on U$25) on C$100 of income. This is one of the issues the Canada/US Tax Treaty attempts to resolve.

The key provisions of the Treaty include:

Sharing Information
- To catch those who might evade taxation on income from one country while resident of the other, Canada and the US agreed to share their information with each other. In fact, the Treaty allows either taxing authority to ask for your complete tax file from the other country (electronic and otherwise). This means if you have income in Canada and you don't report it on your US return, your chance of getting caught has increased significantly. Based on our experience, it appears that real estate transactions, dividends, interest and in particular, government pension payments are exchanged electronically on a regular basis.

Foreign Tax Credits
- The IRS allows taxes paid to Canada as a foreign tax credit against that same income on the US return to avoid double taxation. For example, using our scenario above, you would take the C$10 you paid to Canada, convert it at the prevailing exchange rate and use it as a dollar-for-dollar tax credit on the US return. The Treaty allows you to take the taxes paid to Canada and use them against any tax liability that same income generates on the US return.

Exempt Certain Income - The Treaty sorts out what income is taxed in which country as well as exempting certain income altogether. For example, it provides direction on where capital gains are taxed and exempts wages earned in Canada on the US return.

Withholding Taxes
- The Treaty specifies the various withholding rates for the various types of income sourced out of that country.

Friday, April 22, 2011

What Happens after I File?

Now that the federal income tax filing deadline is in your rear-view mirror, what happens after you file? A lot of taxpayers have post tax-filing questions such as what records do I keep and more importantly, “Where’s my Refund?” The IRS has answers for you below.

Refund Information
You can go online to check the status of your 2010 refund 72 hours after IRS acknowledges receipt of your e-filed return, or 3 to 4 weeks after you mail a paper return. Be sure to have a copy of your 2010 tax return available because you will need to know your filing status, the first Social Security number shown on the return, and the exact whole-dollar amount of the refund. You have three options for checking on your refund:
• Go to and click on “Where’s My Refund”
• Call 800-829-4477~24 hours a day, seven days a week, for automated refund information
• Call 800-829-1954 during the hours shown in your tax form instructions
• Use IRS2Go. If you have an Apple iPhone or iTouch or an Android device you can download an application to check the status of your refund.

What Records Should I Keep?
Normally, tax records should be kept for three years, but some documents — such as records relating to a home purchase or sale, stock transactions, IRAs and business or rental property — should be kept longer.
You should keep copies of tax returns you have filed and the tax forms package as part of your records. They may be helpful in amending already filed returns or preparing future returns.

Change of Address
If you move after you filed your return, send Form 8822, Change of Address, to the Internal Revenue Service. If you are expecting a paper refund check, you should also file a change of address with the U.S. Postal Service.

What If I Made a Mistake?
Errors may delay your refund or result in notices being sent to you. If you discover an error on your return, you can correct your return by filing an amended return using Form 1040X, Amended U.S. Individual Income Tax Return.

Visit the IRS website at for more information on refunds, recordkeeping, address changes and amended returns.

Thursday, April 14, 2011

You Have Extra Time to Make a Contribution to an IRA This Year

This year, you have a few extra days to make contributions to your traditional Individual Retirement Arrangements. That’s because Emancipation Day, a legal holiday in the District of Columbia, will be observed on Friday, April 15, 2011, which moves the due date for filing your tax return and making contributions to your 2010 IRA to Monday, April 18, 2011.

Here are some important things to know about setting aside retirement money in an IRA.

You may be able to deduct some or all of your contributions to your IRA. You may also be eligible for the Savers Credit formally known as the Retirement Savings Contributions Credit.

Contributions can be made to your traditional IRA at any time during the year or by the due date for filing your return for that year, not including extensions. For most people, this means contributions for 2010 must be made by April 18, 2011. Additionally, if you make a contribution between Jan. 1 and April 18, you should designate the year targeted for that contribution.

The funds in your IRA are generally not taxed until you receive distributions from that IRA.

For 2010, the most that can be contributed to your traditional IRA is generally $5,000 (or $6,000 for taxpayers who were 50 or older at the end of 2010), limited by the amount of your taxable compensation for the year. You must be under age 70 1/2 at the end of the tax year in order to contribute to a traditional IRA.

You must have taxable compensation, such as wages, salaries, commissions, tips, bonuses, or net income from self-employment to contribute to an IRA. If you file a joint return, generally only one of you needs to have taxable compensation. However, see Spousal IRA Limits in IRS Publication 590, Individual Retirement Arrangements for additional rules. Refer to IRS Publication 590, for more information on contributing to your IRA account.

Wednesday, April 13, 2011

Things to Know If You Receive an IRS Notice

Each year, the Internal Revenue Service sends millions of letters and notices to taxpayers for a variety of reasons. Here are some things to know about IRS notices – just in case one shows up in your mailbox.

First, don’t panic. Contact me as soon as possible after receiving a notice. Many notices require a response by a certain date. Do not let those deadlines pass or you may lose important appeal rights!

There are a number of reasons why the IRS might send you a notice. Notices may request payment of taxes, notify you of changes to your account, or request additional information. The notice you receive normally covers a very specific issue about your account or tax return. Each letter and notice offers specific instructions on what you are asked to do to satisfy the inquiry.

If you receive a correction notice, you should review the correspondence and compare it with the information on your return. If you agree with the correction to your account, then usually no reply is necessary unless a payment is due or the notice directs otherwise.

If you do not agree with the correction the IRS made, it is important that you respond as requested. You should send a written explanation of why you disagree and include any documents and information you want the IRS to consider, along with the bottom tear-off portion of the notice. Mail the information to the IRS address shown in the upper left-hand corner of the notice. Allow at least 30 days for a response.

Most correspondence can be handled without calling or visiting an IRS office. However, if you have questions, call the telephone number in the upper right-hand corner of the notice. Have a copy of your tax return and the correspondence available when you call to help us respond to your inquiry.