June, July, August 1994
(AMENDED Oct 29, 94) US TAX INFORMATION - NEWSLETTER
In this Issue:
1. Selling US Property (NON RESIDENT ALIENS) Page 1
2. Basis of US Property (Adjusted Cost Base) Page 2
3. US Tax Law changes for 1994 Page 3
4. Requirements to File for US Citizens living abroad Page 3
5. You may be a US Citizen and NOT know it (Children born
before May 24, 1934 of US Mothers added Oct, 1994) Page 4
SELLING UNITED STATES PROPERTY
(WHEN YOU ARE A CANADIAN AND DO NOT LIVE IN THE United States or have a "green card").
Over the years, the United States has made many efforts to tax non-resident aliens. It is easy to understand. Just as Americans left the country and made investments in other countries and made a profit, many foreigners have made investments in the US. If the investment is in bonds or stocks, or bank accounts, or even gold, silver, or commodities, there are no penalties. But when the investment is in real estate, the United States has a minimum tax on ANY PROFIT. This minimum tax has not been enforced for most of the last few years but they have started enforcing it now with a vengeance. I will compare it to parking regulations where someone suddenly starts enforcing a no parking zone. I actually have a 1992 specific letter from an IRS officer stating that there is no minimum tax on the sale of real estate.
However, this minimum tax started at 21% in 1987, 1988, 1989 and 1990, jumped to 24% for 1991 and 1992, and further increased to 26% for 1993 and 1994.
This tax should be calculated on Form 6251. But the form (and my $4,000 US Professional US computer tax program) does not show the calculation or even suggest its existence. The information about the tax is found in detailed instructions which do the calculation "off the form" and then plug it in. It is not surprizing that most people miss it and then get the shock of their lives when the IRS sends them a large bill that they did not expect.
(There is no state tax return in the state of Washington but as I write this newsletter, (Aug 3, 94), I have just been handed a letter from the State of Vermont. This letter enforces Vermont Alternative Minimum Tax on the sale of a property in Vermont).
In the last week of July, I received the following situation by courier:
The client and his wife had bought a piece of property in Whatcom County in the US.
When they sold it in 1993, 10% of the sale price ($2,000 out of the $20,000 sale price) was withheld and they were told that they would get this back by filing a tax return. It is true that they would get it back if there was no profit. They prepared their own returns and initially got back one of the refunds but not the other. They should have left it alone (not really, but you know what I mean). In following up and explaining the situation, someone at the IRS came up with AMT and sent a bill for a total of about $3,640.
In this case, there was a (figures are changed for ease of explanation) $14,000 profit and instead of getting back their $2,000, the IRS has issued bills for another $1,640 of tax (26% of $14,000).
BASIS OF PROPERTY (Adjusted Cost Base) (for US purposes).
When calculating the profit or loss on the sale of a US property, one must first determine the basis or adjusted cost base of the property. The usual method is to take the purchase price and add or subtract relevant amounts.
Examples of Increases to Basis (Additions to cost price):
* An addition to the property (new room, lift and put a basement underneath).
* Replacing an entire roof.
* Paving a driveway, or building a driveway, or an approach bridge or culvert.
* Installing central air conditioning.
* Legal fees and closing costs to purchase property.
* Survey costs, fencing, digging or drilling a well.
* Installing septic tank or alternative energy source.
* Rewiring building, replumbing entire building.
* Assessments for local improvements: water connections, sidewalks, roads.
* Casualty Losses - restoring damaged property.
* Interest and taxes not used as a deduction in other years (US only).
Examples of Decreases to Basis:
* Exclusion from income of subsidies for energy conservation measures.
* Insurance reimbursements.
* Casualty or theft loss deductions.
* Easements (amount received for granting an easement).
* Credit for qualified electric vehicles, (amount of the credit).
* Gain from sale of old home on which tax was postponed (family residence only).
* Residential Energy Credit: Amount of the credit if the cost of the energy item was previously added to the basis.
* Section 179 Deduction.
* Deduction for clean-fuel vehicles and clean-fuel vehicle refuelling property.
* Depreciation: The greater of the depreciation deduction which decreased your tax liability for any year or the deduction you could have claimed under the depreciation method selected.
* Corporate distributions: Non-taxable amount.
US TAX LAW CHANGES EFFECTIVE FOR 1994
A. The self-employed health insurance deduction is eliminated.
B. The $135,000 limitation on earnings for medicare insurance has expired. The entire amount of earnings above $400 is subject to 2.9% medicare insurance tax.
C. Business meals and entertainment deductions are reduced to 50% of the amount spent from the previous 80%.
D. CLUB DUES. No deduction is allowed for amounts paid or incurred after 1993 for membership dues in any club organized for business, pleasure, recreation, or other social purposes. This includes business, social, athletic, luncheon, sporting, airline, and hotel clubs.
E. TRAVEL EXPENSES. No deduction is allowed for travel expenses paid or incurred after 1993 for a spouse or dependent or other individual accompanying you on business travel unless that person is your employee and the travel is for a bona fide business purpose and would otherwise be deductible by that person.
F. TAXABLE SOCIAL SECURITY BENEFITS. More of your benefits may be taxable in 1994. Beginning in 1994, up to 85% of your Social Security may be taxable at different income levels.
G. CHARITABLE CONTRIBUTIONS. Beginning in 1994, receipts must be produced for charitable donations of more than $250.00 total.
H. MOVING EXPENSES. Beginning in 1994, the move must be more than 50 miles (2 x's Canada's 25 miles). Meals, pre-move househunting expenses, temporary quarters, and real estate expenses are no longer allowed. (Canada still allows temporary quarters of 15 days and real estate expenses in old and new location).
I. RENTAL REAL ESTATE LOSSES. Certain individuals who materially participate in real property trades or businesses and who perform more than one-half of their personal services and more than 750 hours of service in those trades or businesses are not subject to the passive activity limitations.
But, I don't want to be an American!
- #### The next paragraph is a correction #### -
As the following page shows, you may be an American by birth, or because your parents were and have now spent a lot of time in the US. In other words, if your mother's parents were Americans by birth or naturalization and one of them had lived in the states at any time for any period, your mother is a US Citizen. If she lived in the US for any period at all, and YOU were born between 05/24/34 and 01/12/41, and spent two years in the US before age 28 (for instance, two years at Brigham Young University), you are a US citizen. If you claim this birthright, you MUST file US tax returns. Similarly, since you are a US citizen, if you have been physically present (trailer at Birch Bay, Phoenix condominium) in the US for a few years (2 after age 14), and you have a child born after November 13, 1986, that child is a US citizen.
Remember, "ANY" US citizen living in Canada must continue to file a US return for as long as they remain a US citizen even if "THEY HAVE NO US INCOME". If you give up your citizenship to avoid this income tax, the IRS law still gives them the right to tax you for income, gift, and estate tax for 10 more years. If you die in this time, your executor is responsible to prove that you did not give up your citizenship to avoid income, gift or estate tax. GOOD LUCK!
I was awakened at 7 AM a couple of days ago by a US lady from Kelowna whose husband had put a whole lot of property in her name to escape Canadian income tax. She had reported some $125,000 of Capital Gains in Canada of which $100,000 was free of Canadian income tax because of the now cancelled $100,000 capital gains exemption. However, she did not see a single cent of the money because her husband had done all the deals, signed all the papers, and taken all the money. They are now split and the money is gone now anyway in property deals that didn't work out (money lost too late to carry losses back against past profits). Now the US government wanted over $40,000 US in tax and penalties on her CANADIAN capital gains.
Another place the problems develop is with dividends from Canadian corporations. It is possible to have $21,352 of actual ($26,690 grossed up) dividends from Canadian corporations and not pay any tax to Canada because of our dividend tax credit. However, when this money is reported to the US by the US citizen spouse (assuming no difference in exchange) the Canadian resident finds themselves with a $2,500 (or so) US tax bill on Canadian Income. Showing again that anyone with a US association, should only deal with a "PROVEN" US specialist when it comes to making investments in mutual funds, stock, real estate, RRSP's, and especially limited liability partnerships, (LLP's), etc. (see the Jan 94 issue of the CEN-TAPEDE for more information.
Remember, the CEN-TA GROUP provides that information for real estate and other investments as well as providing a property management service and US and Canadian tax preparation service. Call George Hatton, CA for Mutual Fund and RRSP Information; call Sonja Clark, CA, CPA, LLB for US / Canadian Corporate Accounting; call David Ingram or D'Arcy von Schleinitz for US / Canadian Tax personal tax preparation. (604) 681-1646. Marge Maddigan at 986-6253 for property management.
For determining whether LEGITIMATE CHILDREN BORN OUTSIDE THE U.S.
acquired U.S. citizenship at birth.
PERIOD | PARENTS | RESIDENCE REQUIRED OF: | | PARENT or | CHILD STEP 1 | STEP 2 | STEP 3 | STEP 4 Select | Select | Measure citizen parent's residence | Determine whether child period in | applicable | against the requirements for the | has since lost U.S. which | parentage | period in which child was born. | citizenship. (The child child was | | (The child acquired U.S. citizen- | lost on the date it became born. | | ship at birth if, at time of the | impossible to meet the | | child's birth, citizen parent had | necessary requirements, | | met applicable residence | never before age 26.) | | requirements.) | Prior to | one parent | Citizen parent had resided in the | None. 05/24/34 | US citizen | U.S. (Originally only fathers could | | | transmit; mothers added Oct, 94) | [see note (5)] On/after | Both are | One had resided in the U.S. | None. 05/24/34 | citizens | | & prior to | One citizen | Citizen had resided in the U.S. | 5 year's residence in the 01/13/41 | one alien | | U.S. or its outlying | parent. | | possessions between ages of On/after | One citizen | Citizen had resided in U.S. or its | 13 and 21. OR, 2 years' 01/13/41 | one alien | outlying possessions 10 years, at | continuous presence in and prior | parent. | least 5 of which were after age | U.S. between ages 14 and to | | 16, or if citizen parent served | 28. (NONE, if at time 12/24/52 | | honorably in U.S. Armed Forces: | of child's birth, citizen | | (1) between 12/07/41 and 12/31/46 | parent was employed | | (5 of the required years may | by a specified U.S. | | have been after age 12); or (2) | organization. This | | between 12/31/46 and 12/24/52, | exemption is not applicable | | parent needed 10 years physical | if parent transmitted | | presence, at least 5 of which | under *(1) or *(2) opposite.) | | were after age 14. | Notes (1), (2), and (4). | Both are | One had resided in the U.S. or its | None. | US citizens | outlying possessions. | On/after | Both are | One had resided in the U.S. or its | None. 12/24/52 | citizen | outlying possessions (3). | & prior to | One citizen | Citizen has been physically present in | None. 11/14/86 | one alien | US or outlying possessions 10 years, | | parent. | at least 5 which are after age 14 (3). | On/after | Both are | One had resided in the U.S. or its | None. 11/14/86 | citizen | outlying possessions | | One citizen | Citizen has been physically present in | None. | one alien | US or outlying possessions 5 years, | | parent. | at least 2 which are after age 14 (3). | Notes
1. Absence of less than 60 days in the aggregate (total) will not break continuity of physical presence for this purpose. Honorable service in US armed forces counts as residence or physical presence.
2. No specific period of residence is required if alien parent naturalized before child reaches 18 years and child begins to reside permanently in U.S. prior to 18th birthday.
3. Physical presence abroad of dependent unmarried son or daughter as member of household of a person serving honorably in U.S. Armed Forces or employed by U.S. government or international organization may be counted as physical presence.
4. The retention requirement was repealed by Act of 10/10/78. Persons who had on 10/10/78 failed to retain are relieved from having to do so. Those who have previously lost citizenship by a failure to satisfy retention requirements of the Acts of 1934, 1940, and 1952 may not be reinstated.
5. Until Oct 20, 94, only father could transmit. Changed with President Clinton signing the Technical Corrections Bill giving citizenship to children of US citizen mothers.
(recreated from official US documentation for the CEN-TA-PEDE, newsletter of the CEN-TA GROUP).
CEN-TA Cross Border Services - Tax, Visas, Immigration