The new administration in the U.S. may be talking about changes to the tax system and rates but none will be made in time to affect 2016 tax returns. For the estimated one million U.S. citizens living in Canada who may be required to file a U.S. tax return, there are a few changes that could have an impact when they send their paperwork to the IRS.
While most U.S. citizens living abroad do not file their returns early for a number of reasons, the Protecting Americans from Tax Hikes (PATH) Act of 2015 is having an impact for filers who are used to getting their tax refunds early. The PATH Act requires the IRS not to release refunds for returns claiming the Earned Income Tax Credit (EITC) until February 15, 2017. For taxpayers used to receiving the EITC at the beginning of the year, this is a bit of a shock.
Aimed at low to moderate income working individuals, couples and families, the EITC is a refundable tax credit that depends on a recipient's income and number of children. EITC cannot be claimed by ex-pats who have lived outside the US for more than six months. The PATH Act made a number of other changes to EITC to make sure it is being claimed correctly. The IRS can bar an individual from claiming the EITC for 10 years if they find it has been fraudulently claimed and it is subject to the penalty for erroneous claim for refund and credits.
The Affordable Care Act (ACA) may not affect U.S. citizens living in Canada but under the ACA, there are penalties for not having healthcare coverage while living in the U.S. The penalty is either 2.5 per cent of household income above the income tax filing threshold or a maximum of $2,085. U.S. taxpayers residing outside of the U.S. are exempt from this penalty. But Canadian citizens living in the U.S. long enough to meet the definition of US tax resident must carry healthcare coverage that meets the minimum standard set out under the ACA. Unfortunately, Canadian provincial coverage does not meet the standard and there will be a penalty assessed if additional insurance is not secured while residing in the U.S. However, depending on the situation, exemptions from the penalty may be available for Canadians temporarily working and living in the U.S.
While the filing deadline is April 18, 2017, U.S. citizens living in Canada and abroad automatically receive a tax filing extension until June 15, 2017. If you file for an additional extension, the due date is October 16. However, the extension applies only to the tax return filing and not the tax payment if you owe tax. You are still required to submit your tax owing by April 17 to avoid paying interest on the outstanding amount. But late payment penalties do not start until June 15.
There are also changes to other due dates. For 2016 and going forward, the Report of Foreign Bank and Financial Accounts (FBAR) due date has changed from June 30 to April 15. U.S. expats can file for a maximum extension of six months ending on October 15. . This now aligns the FBAR due date with the tax return and gives people filing outside of the U.S. more time to gather their financial information. Although there is currently confusion around how to apply for the FBAR extension, filing Form 4868 to receive an extension of time to file your personal tax return should be done to assure you receive the six month extension to file your FBAR.
For people who need to file U.S. tax returns but are not eligible for a Social Security Number (SSN), they are required to have an Individual Tax Identification Number (ITIN). There are changes that will impact ITIN holders. If you have not used your ITIN on a federal tax return in three years and need to file in 2017, you need to renew your ITIN. If you were issued your ITIN prior to 2013, your number will be expiring and you will need to renew. The first ITINs that will expire are those with the middle digits of 78 and 79. You cannot file a U.S. tax return without either a SSN or ITIN.
New rules may affect taxpayers hoping to claim the refundable portion of the child tax credit. If you have a new ITIN or SSN, you can only claim the credit if your ITIN/SSN was issued - not applied for - on or before the due date of the return. You are not allowed to claim this credit retroactively either once you receive an ITIN or SSN.
Though the new administration may have hinted at repealing the Foreign Account Tax Compliance Act (FATCA) as part of their campaign, it will not apply to 2016 tax returns. Data and information exchanges between the U.S. and its partner countries will continue. Financial institutions are required to provide information or face significant penalties. If you are a U.S. expat, you should investigate your FATCA filing requirements and if you need to disclose your assets under the program.
The U.S. is only one of two countries that require taxpayers to file based on citizenship and residency rather than just residency like the Canadian system. The U.S. Canada Tax Treaty will mean you are not taxed twice on the same income but make sure you understand your IRS filing obligations.
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