Moving abroad to another country, even if it is across the border, involves a whole bunch of things you need to take care of. But, the most critical task on your list should be figuring out tax considerations. Do your research and consult a knowledgeable expat tax consultant who can guide you on how to navigate the regulations. Staying compliant is necessary to avoid incurring penalties that could run up to several thousand dollars. Here are some of the most important facts to keep in mind.
You’ll File Tax Returns in the US and Canada.
US expats holding citizenship status or a Green Card must file returns every year with the American IRS regardless of where they’re living. You’ll complete and submit Form 1040 with all the details of the incomes you’ve earned from American and foreign sources. Any rental income, interest, dividend, and returns from investments should also be declared in your return. Even if your total income falls below the taxable bracket, you must file a return.
You May Not Have to Pay Taxes to the IRS
Many expats are not liable to pay taxes thanks to the different exclusions made available by the IRS. The Foreign Earned Income Exclusion (FEIE) permits you to deduct your taxable income from a limit set down by the IRS each year. This limit has been fixed at $108,700 for 2021, which means that you’ll pay tax only on the amount remaining after deductions. The Foreign Tax Credit (FTC) is yet another exclusion you can use. Whatever taxes you pay to the Canadian government can be claimed as tax credit in your return. However, this credit is only applicable on the taxes for the income over and above the $108,700 limit. Keep in mind that the exclusions are not automatically applied. You must complete and submit Form 2555 or 2555-EZ to take advantage of this benefit.
Make Sure You Comply with the Bona Fide Residency Status
Before applying for tax deductions, make sure you qualify for the Bona Fide Residency status in your new country. According to this rule, you should have spent at least 330 years out of a calendar year in Canada with no intention of returning to your home country soon. When calculating this time, make sure to exclude the travel time to and from Canada. You have to be physically present in the country and not en route by air or road.
Some Other Helpful Facts
Many Americans consider renouncing their citizenship status to avoid the hassle of filing taxes in two countries. But, before you file an application, make sure your IRS dues for the last five years have been paid up, and all other paperwork is complete. Even if you have made mistakes in past return filings, you can use the form 1040X to rectify the errors. But retaining citizenship will let you claim Social Security benefits even after relocation.
Tax considerations for US expats in Canada can be complex and hard to understand. Rely on the expertise of a qualified tax consultant for help.