david ingram's US/Canadian Newsletter April 15, 1997
TAX FILING DEADLINES - U S and CANADA Page 241
NON-FILERS CAUGHT IN A WEB OF TAX BILLS Page 241
U S REQUIRES INDIVIDUAL TAXPAYER IDENTIFICATION NUMBERS Page 241
UNITED STATES ESTATE AND GIFT TAX RATES Page 242
DYING WITH AMERICAN PROPERTY (EVEN U.S. STOCK IN CANADA) Page 243
NEW SOCIAL SECURITY TAX RULES FOR 1997 Page 243
BLANK W-7 FORM TO GET YOUR ITIN Page 244
BLANK SS-4 APPLICATION FORM (U.S. EMPLOYER OR ESTATE) Page 247
June 16, 1996 is the filing deadline for U.S. citizens (or green card holders out of the U.S.) and Canadians with non Dec 31/96 year ends to file their 1996 Canadian, American and state income tax returns.
If you have not been filing your U.S. returns, be sure and catch up now. Penalties are too large to ignore. Ask for the Sept 95 newsletter for examples of U.S. enforcement methods. Ask for Oct 95 for the rules for U.S. citizens living in Canada.
In the last week, one client arrived with a $27,000 1995 tax bill from California after ignoring a letter from the California State Franchise Board and another client arrived with a $67,000 1993 U S federal tax bill after failing to file his 1993 and 1994 returns even though 1992 and 1995 had been filed.
In the California case, the actual tax bill will be less than $1,300 "IF" California will accept a return. In the $67,000, federal case, the actual tax bill is $20.00 "IF" the IRS will accept a late return.
In both cases, the tax bills were largely based on gross stock sales through U.S. stock brokers (Charles Schwab in both cases). What happened is that the IRS obtained copies of all sales of stock and taxed on the gross sale without allowing a deduction for the "cost" of the stock. This is also what caused M L's $196,000 tax bill featured in the Oct 95 newsletter.
NEW REGULATIONS REQUIRE INDIVIDUAL TAXPAYER IDENTIFICATION NUMBERS (ITIN or TIN) FOR U.S.
Up until February, 1996, it was relatively easy to get a United States Social Security number if you needed it for bank accounts or to report rental income in the United States. Filling out a one page SS5 form and showing up at the Bellingham office of the Social Security Administration was all that was necessary (you did need some identification). At that time, the card issued would have "not valid for employment" stamped on it and you had a number.
In February, 1996 this was stopped and individuals who needed a number to report the sale of their summer home in Birch Bay or winter home in Florida were told to file their tax return with no number and that the IRS would issue a request for an SSN and one would be issued.
That has changed again. New regulations which seem to take effect on May 23, 1996 require that an individual MUST HAVE an "ITIN" BEFORE filing their U.S. Tax return which means you must apply for the number quite a while before filing the return.
"ITIN'S" will be required for some Estate Tax returns, Income Tax Returns, and Gift Tax returns. This means that if you die owning U.S. stock (could be in Canada) or a seasonal residence in the U.S., or a rental property in the States, you better get your number now.
Apply on form W-7. Reg 301.6109-1(h)(1) requires that a foreign person furnish an ITIN on a tax return filed after 1996. Applicants must supply documentary evidence to establish their alien status. Examples of acceptable evidence would be documents such as a passport, driver's licence, birth certificate, identity cards, immigration documents, etc.
An ITIN is not a valid number for an individual who is in the U.S. with a green card (resident alien status) or some other working visas such as a L1, H2B, or TN (Treaty NAFTA) visa. This person must still obtain a legitimate "working" Social Security Number.
Many individuals have one of the old Social security number cards which was stamped "NOT VALID FOR EMPLOYMENT". In some cases, they found out that all an American Employer wanted was "a number"; they never wanted to see the actual card. As a consequence, there are people who have been working illegally in the U.S. for 10, 20 or 30 years.
Those individuals should be aware that section 414 of the 1996 ILLEGAL ALIEN AND LEGAL ALIEN RESPONSIBILITY ACT "requires" the IRS to report aliens who report earnings against Social Security Numbers which do not authorize employment. There will be severe penalties imposed including being banned from the U.S. for up to 10 years.
Table for Computing U S Gift & Estate Tax (from 709 US Gift Tax Return)
Column A Column B Column C Column D
Rates of tax
Taxable Taxable Tax on on excess
amount amount amount in over amount
over >> not over -- Column A in Column A
.......... 10,000 ........... 18%
10,000 20,000 1,800 20%
20,000 40,000 3,800 22%
40,000 60,000 8,200 24%
60,000 80,000 13,000 26%
80,000 100,000 18,200 28%
100,000 150,000 23,800 30%
150,000 250,000 38,800 32%
250,000 500,000 70,800 34%
500,000 750,000 155,800 37%
750,000 1,000,000 248,300 39%
1,000,000 1,250,000 345,800 41%
1,250,000 1,500,000 448,300 43%
1,500,000 2,000,000 555,800 45%
2,000,000 2,500,000 780,800 49%
2,500,000 3,000,000 1,025,800 53%
3,000,000 10,000,000 1,290,800 55%
10,000,000 21,040,000 5,140,800 60%
21,040,000 --------------- 11,764,800 55%
DYING WITH AMERICAN PROPERTY
If you have up to $1,200,000 (U.S.) of publicly traded U.S. shares (Coca Cola, PACTEL, AIRTOUCH, Kimberley Clark) in Canada, there is no U.S. estate tax. However, if you have $15,000 motor home lot in Arizona and any amount of U.S. stock, you have to deal with U.S. estate tax.
In general, the first $600,000 of a U.S. estate is exempt from U.S. estate tax but this does not necessarily apply for non-residents.
It used to be that a non-resident was exempt up to $60,000. Under the new law which took effect January 1, 1996 but was retroactive to Nov 10, 1988, the exemption is calculated as a percentage of $600,000.
This amount is calculated by dividing the value of the U.S. property by the total value of the estate and multiplying the result by $600,000.
Therefore, if one dies with a $100,000 condo in Florida and the total estate is worth $500,000 U.S., the exemption is (($100,000/$500,000) x's $600,000 = $120,000) $120,000.
And, if one dies with a $100,000 condo and the total estate is worth $1,200,000 U.S., the exemption is "only" ((100,000/$1,200,000) x's $600,000 = $48,000) $48,000 and $52,000 is subject to U.S. estate tax.
The estate tax is: $8,200 on the first $40,000 plus 24% of the next $8,000 ($1,920) for a total of $10,120.00
If the estate was in California or another 42 states with estate tax, there would also be a state estate tax as well.
WHEN ONE DIES with United States Property
If you are a U.S. citizen or a resident alien, your executor files a 706 Estate return for the assets at death and then your executor has to apply for a U.S. employer number on an SS4 application (page 247). After he or she has the number, the estate must file a 1041 estate tax return for the earnings of the estate after death.
If you are a non-resident alien at death, then your executor will file a 706N for the assets held at death. The executor will then file a 1040NR to deal with any income after death. The executor may have to apply for an ITIN for the estate on a W-7 (see page 244).
SOCIAL SECURITY RULES CHANGED AGAIN FOR 1997
After the debacle caused by the changes to Social Security taxation in Canada which was introduced with the 1996 changes to the US / CANADA Tax convention, I am pleased to see that the situation has changed. In 1996, Social Security was taxed only in the United States. In 1997, it will go back to pre 1996 rules and have 50% taxed in Canada for non-resident non-citizen (of the U.S.) recipients. At the moment, there does not seem to be any indication that it will be retroactive to 1996 but "STAY TUNED", we will let you know soon. If you want the Social Security tax rules for 1996, ask for the January, 1996 edition of the CEN-TAPEDE.