As another question - how the heck does the IRS know how much a person makes in a foreign country. It’s not like a typical non-US employer sends out tax statements to every government in the world.
Other than it being on the ‘honour’ system, how could the IRS possibly know if a guy even had a job unless you tell them? Even if they decided to audit you, how do they obtain the documents from foreign employers/governments.
In this post-9/11 era it’s dangerous to assume the US government won’t make the effort. And it may come from far left field.
In the case of countries with tax treaties, your income is reported to the IRS via the local revenue agency.
Is this typically done on a regular basis - or only in the case of audits where the IRS specifically requests the info. If it is done on a regular basis, how does the foreign country know which statements to divulge to the IRS?
I don’t doubt you, but it seems unlawful for a country to divulge very personal details from your tax statements regarding one of its citizens (in the case of dual citizenship) to another country.
Sure, and it would be if the person wasn’t also a national of another country.
Regardless, I believe his legitimate observation was with respect to how proactive said reporting is.
I would think that there is a great deal of variability as in my experience national tax authorities relative to their international obligations are mostly reactive (we do it when you kick us - kicking being either from the rate payer or from another auditing authority). While doubtless there are cases of fairly automatic reporting relationships - I should not be surprised if that was the case of UK to USA - I would be very surprised if that is ordinary.
I have skimmed this thread, so I might have missed it, but I didn’t see any mention of the foreign tax credit. The income inclusion applies only to earned income and that explicitly does not include pensions (which is where nearly all my income comes from). But I calculate my Canadian taxes and then this becomes a credit that is taken directly off my calculated US taxes. Since Canadian taxes are always considerably higher, this means that any computed US taxes disappear.
For the first couple years, this was deducted before alternate tax was applied and I had to be very careful not to be subject to the alternate minimum, but one of the minor effects of one of Bush’s tax cuts was to reverse the order of alternate minimum and foreign tax credit. Other payroll taxes are also exempt by tax treaty since Canada has its own social insurance taxes that I pay too. One year, the IRS asked me why I hadn’t paid them and I merely circled the item in their own instruction book that said explicitly that residents of Canada are exempt and mailed it back to them. Utter waste of time and postage for both of us. As is the wole charade of my filling up a 1040 every year and their sending me all the forms and instructions.
I have a good friend who has not filed US tax returns in decades and, in practical terms they have no way to catch up with him. If you cease being a US citizen you are supposed to file for ten years, but they have no practical way to enforce that. Once upon a time, there was a question for non-residents on the passport application form asking if you had filed a tax return in the previous year, but that question has disappeared.
A word on the earned income exclusion. When I first became aware of it, around 1960, it was $80K. And they were recruiting young men to go to Greenland for 18 months for $120K, completely tax free (to build the DEW line or somesuch… Since they also provided meals and living accommodations and there was nothing there to spend money on, then unless you got into gambling, you could walk away with $120K, probably the equivalent of 3/4 million at least today and have a nice nest egg to start life. In fact, managing with care you could have retired on it (assuming you could protect against inflation).
Hari - thanks for the info. Sounds like you’ve experienced a lot of this firsthand.
How do you find the CPP compares to SS? Do you know how an inheritance windfall would affect a person? I was thinking that is one of the circumstances that might bump an average persons yearly income over the 91K. Would you still be typically okay since you’d get a credit for the Canadian taxes paid on the inheritance?
I’m a Canadian living in the US - and am contemplating becoming dual but would like to understand some more of the tax implications of this for if/when I move back to Canada.
Except in Canada inheritance taxes are paid by the estate not the beneficiary so the estate would be taxed by Canada and you by the US.
Lotteries/casino wins would be unpleasant too since windfalls are not taxed in Canada.
Good info. As a related question, if an American is living in Canada and receives an inheritance from another American living in the US - then Canada wouldn’t touch it - just the IRS?
I realized I’d be SOL with lottery winnings - but the odds are so far against ever winning (especially since I rarely play).
Well, the IRS would go after some of the estate regardless of who inherited. Taxes are collected on the value of the estate, whether it goes to US citizens or not.
I don’t think Canada even taxes inheritance, at least ones that I am ever likely to see. As for the US, I think nothing under $2,000,000 is taxed. If you are in that bracket see a tax specialist as you are unlikely to get that kind of advice here (but what do I know?). Not only are lottery winnings not taxed in Canada, neither are gambling winnings. Of course, Americans would be expected to pay them, but how would the IRS even know.
Well, my wife and I have just finished our Canadian taxes and now I have that useless exercise of doing a US return.
As for SS compared to CPP (actually, we in Quebec get QPP instead, but I have always assumed that the amounts are similar). I get nearly 10K a year from QPP. Since I retired 25 months before I was 65, this was actuarily reduced by 12.5%, so that I would be getting something like 14K had I waited till 65. They still claim that, on average, I am better off getting it for an extra 25 months and I don’t feel figuring it out. But that is not all. The feds pay everyone over 65 an old age security payment of nearly 6K. This is “clawed back” as your income exceeds around 66.5K and is completely gone when your income hits about 95K In addition to that there is a further income supplement, roughly speaking, for people whose only income is QPP + OAS I have no idea (fortunately) how much that is or what the actual income limit is.
In addition, there is medicare. Not the kind in the US (I am not talking about the new bill, but medicare for pensioners). There is no copay and no deductible here. When you go into a hospital, as I did when I broke my ankle (slipping on black ice) six years ago, you flash your medicare card and never see one cent of billing. Even the phone was free (which wasn’t true when my son was born 35 years ago), although I would have had to pay to rent a TV. I do have some health insurance from my employer that covers things like chiropractic, blood tests carried out by my doctor (they would be free at the hospital if I cared to schlep myself over there and wait an hour) and so on. Nearly all doctors are in the system, so there is no “Sorry, I don’t accept medicare patients” that I hear more and more elderly are getting in the US.
One interesting fact: I pay about 45% of my taxes to the Feds and 55% to Quebec and nearly 50% of the Quebec budget goes to medical care. Some of the Federal budget goes towards medical care too, so at least 30% of my taxes go towards medicare. This is a major reason why Canadian taxes are always larger that American.
If I moved back to the US now, my Canadian tax burden would be reduced to a flat 25% and that would still be a credit against US taxes. But I would lose medicare and am not eligible for US medicare as I have only 34 covered quarters. But even so it would be so poor compared to what I have here that I cannot really consider it. Incidentally, I have three kids living in the US, so the pull is enormous.
No it’s not done routinely and I’m not sure if it’s ever done at all. I’m a permanent resident of the US with some income in my home country. I do the right thing with taxes and there is a treaty between the countries but the other country certainly doesn’t report my income to the IRS. It’s basically an honor system much like the rest of the tax system. If the IRS decided to audit me then I guess they’d want to see supporting documents like tax returns and statements from the other country etc but I think it would be up to me to provide them.
To the original topic, I think the US policy is somewhat obnoxious. It seems absurd that a US citizen (and it sounds like permanent residents which includes me) has to pay tax to the US if they neither live in or have income in the US. My home country wouldn’t require anything from me if it wasn’t for the income I still have there.
If I go home to retire then at my likely income level it will just mean sending in a return every year and not paying anything so I guess it’s a not really big deal I guess but the big brother nature of it is a bit objectionable.
Of course if you truly never intend to return then you can probably tell uncle sam to get lost but burning bridges is seldom a good idea. If you’re a permanent resident then that will expire eventually anyway if you’re away long enough.
It doesn’t apply to permanent residents once you’ve left, except as to income earned in the US. Where is your home country?
I don’t think that’s right. This publication seems to be the definitive document. I haven’t read it in detail but it always seems to talk about “U.S. citizen or resident alien” as being effectively the same to the IRS.
It seems pretty clear that if I’m a single resident alien with worldwide income of more than $9,350 USD then I’d need to file a return with the IRS even if none of that income is earned in the US
If you’re a single resident alien you haven’t left.
As long as you continue to hold a green card, you are considered a lawful permanent resident of the US. When you leave the US, you renounce your lawful permanent residency and return your green card to USCIS, and bingo, you don’t have to pay US income tax anymore (except for the part of the year where you resided in the US).
Simply exiting US borders does not automatically invalidate one’s permanent residency. I believe it’s possible to live up to six months outside the US worry free, and have that extended (with cause) to a full year or longer.
At no point am I aware of an act of returning one’s green card to the USCIS, except through some formal immigration proceeding. You certainly don’t surrender it at the airport on your way to boarding your plane.
Urban myth.
:smack: I didn’t think my post was that unclear.
You renounce your residency if you are moving back to your home country (or elsewhere) and no longer want to be a US permanent resident, not every time you get onto a plane.
Apart from anything else, if you gave up your green card on the way out you wouldn’t be able to get back in.