Hi David, If email is not the best method to ask a question, please let me know other options. I am interested in using an online US service as a medium to buy US stocks and enroll in a dividend reinvestment plan (which would be taxed). The issue is I'm a dual citizen and have lived and worked in Canada all my life (now 23) so I have not payed any US taxes. I do have all my documentation though (US passport, SSN). What would be easier and more productive or maybe more importantly the most legal, to enroll in US stocks as a Canadian and pay taxes here or to enroll as a US citizen and pay taxes on the dividends in the US? If I enroll as a US citizen, will that mean I will open up a world of trouble in terms of the IRS coming after other income I have from Canadian employment? Basically I am concerned that if I registered as a US citizen abroad I'll be flagged to report all my income for tax (eg. taxed by both countries on the same dollar). What are you thoughts? Thanks!! xxxxxxxx-------------------------------
The U.S. taxes on citizenship
first and residency or physical presence second. If you have another
tax home, and are just an extensive visitor in the States, you can
escape U.S. tax on your income from other countries. However, if you
renounce your other tax home or become a "green card" holder or are in
the U.S. for more than 183 days in one year or under the substantial
presence test, you are subject to U.S. income tax on your world income.
The U.S. taxes its citizens and green card
holders wherever they are and no matter what they are doing. The U.S.
taxes its citizens in Canada and they will tax them in the North Sea.
The U.S. will add on the benefit of housing allowances, car allowances,
servants, and education allowances for people who have not been in the
U.S. for twenty years but who are still U.S. citizens. If
you want the benefit of U.S. Citizenship, you pays your taxes.) In
2006, the first $82,400 U.S. of income earned from personal services
(as opposed to capital) is exempt if you have been out of the country
for a full calendar year in one test or for 330 out of 365 days in
another test using a fiscal year (form 2555).
However, being "exempt" does
NOT mean that you do not have to file a tax return. You must still file
your U.S. 1040, report the Canadian Earnings in U.S. dollars and claim
the "up to $82,400 U.S." by filing a form 2555 with the 1040. If you
have investment, [INCLUDING AMOUNTS EARNED WITHIN YOUR CANADIAN RRSP],
rental, royalty, or any income other than from services, you must also
report the income in U.S. dollars. Since you will have
paid tax to Canada first, you will file a Form 1116 with the 1040 to
claim your foreign tax credit. A separate Form 1116 must be filed for
each kind of income, i.e. rental, pension, dividends, etc.
The RRSP earnings may be
exempted under ARTICLE XXIX.5 of the U.S. / CANADA Income Tax Treaty
1980 - file form 8891.
Social security (FICA) taxes
usually do not have to be paid to the U.S. under Article XXIX.4 of the
U.S./CANADA Income Tax treaty or Article V of the CANADA / U.S. Social
Security Agreement. (I sure hope all this is impressing
you).
Therefore, a U.S. citizen
living in Canada who had a rental house, a job, an RRSP, some dividends
and some capital gains from the sale of stock would file his or her
Canadian return first and then file a U.S. return with these forms:
* 1040 - is the basic return
for a citizen or resident of the U.S. or landed immigrant of
* Schedule A - to claim
itemized deductions if needed
* Schedule B - to report the
dividend income
* Schedule D - to report the
capital gains
* Schedule E - to report the
rental income
* 4562 - to report
depreciation on the rental house
* 1116 - (maybe two foreign
tax credit forms) - one for any income from services over $82,400
- one for the rental, capital gains, and dividend income and another
for the wages.
* 1116(AMT) - two more forms
to calculate the foreign tax credit for Alternative Minimum
Tax purposes (AMT)
* 2555 - to exempt up to
$82,400 (2006) U.S. of earnings from services - Note that this ran from
$70,000 to $80,000 before.
* 6251 - Alternative Minimum tax form
* 1161 AMT - AMT foreign tax credit
* FICA (Social Security)
exemption - to exempt income from U.S. FICA
* 8891 - RRSP election forms
to exempt income earned within the RRSP from current U.S. income tax
until withdrawal
* TDF 90-22.1 form(s) - to
report foreign bank accounts including Canadian RRSP accounts which are
considered "foreign trusts" - failure to file this form can result in
up to a $500,000 fine PLUS up to five years in jail
He or she might also have to
file either of the following two specialty forms when he or she owns
shares in corporations.
* 5471 form - If you are a
U.S. citizen and 10% or more owner of a Canadian corporation.
Failure to file this form can create fines of $10,000 every 30 days up
to $50,000
QUESTION: I would like to put some money away for retirement. I'm a U.S. citizen living in Canada for the near future, but I know I'll be living in the U.S. again before I retire. Should I put my money in an RRSP or an IRA?-----------------------------------------
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