Source: http://cadesky.tax/author/stephane/
Timestamp: 2019-04-19 23:18:40+00:00

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One distinct aspect of the U.S. tax system is the ability for a taxpayer to extend the due date of a tax return. This allows the taxpayer additional time to complete and file an income tax return without being assessed a late filing penalty. Late filing penalties are assessed at the rate of 5% per month up to a maximum of 25%.
In most cases a tax return due date can be automatically extended by up to six months. All that is required is the filing of the proper extension form. No explanation from the taxpayer is required and the IRS cannot deny a properly filed extension. However, the timely filing of the form is crucial in order for the extension to be valid.
It’s important to realize that extending the filing due date of a tax return does not extend the tax payment due date. Taxpayers who do not pay at least 90% of the ultimate taxes due by the original due date will be assessed a late payment penalty. The penalty is imposed at a rate of 1/2% per month until paid. Interest will accrue, on both the taxes due and any penalties, from the original payment due date until payment is made. The rate of interest is equal to the short-term applicable federal rate (AFR) plus 3%.
If the due date falls on a weekend or a statutory holiday, the due date is extended until the next business day.
An individual taxpayer can obtain an automatic six-month extension of time to file by filing Form 4868, “Application for Automatic Extension of Time to File U.S. Individual Income Tax Return,” on or before the original due date of the return. No signature is required and the form can be filed electronically or mailed to the appropriate IRS office. A proper estimate of the tax due for the year must be made, but full payment is not required.
A U.S. citizen or resident who is “out of the country” on the regular due date of a return is allowed an automatic two month extension to file without filing Form 4868. However, if additional time is required beyond this extended due date, the taxpayer can file Form 4868 and will be allowed an additional four months to file the return.
U.S. citizens or residents who do not reside in the U.S. may also request an additional 2 month extension. This extension, however, is not automatic and can be denied by the IRS.
A corporation generally may obtain an automatic six-month extension of time for filing its income tax return by filing Form 7004, “Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns,” provided that the application is timely filed, properly signed, and a remittance is made of the amount of the tax properly estimated to be due. A seven-month extension is available for returns of C corporations with tax years ending June 30.
An automatic extension of time for a partnership, S corporation or trust to file an income tax return can be obtained by filing Form 7004, “Application for Automatic Extension of Time To File Certain Business Income Tax, Information and Other Returns.” The length of the automatic extension depends upon the type of return. For partnerships and S corporations, an automatic six month extension is available. For certain estate and trust returns, an automatic 5½ month extension is available.
A summary of U.S. tax return regular due dates and extended due dates is below.
U.S. citizens and residents who reside outside of the United States receive an automatic two-month extension of time to file to June 15. No filing is required for this automatic extension.
Those U.S. states that impose an income tax also have a provision to extend a tax return’s due date. However, keep in mind that the regular due date and extended due date for a state tax return may be different than the federal dates. Also, each state has a different filing requirement for an extension — some states will recognize a federal extension form while other states have their own forms. It is important to review an individual state’s extension filing requirement.
For most individuals, their principal residence is their single most important asset. In Canada, when an individual sells their principal residence the gain on the sale is exempt from capital gains tax in most instances. A taxpayer must designate the property as their principal residence when they file their Canadian personal income tax return. This is one of the biggest gifts to individuals in the Income Tax Act.
Canadian residents who are also U.S. persons will also be subject to the U.S. rules surrounding the sale of a principal residence. These rules are quite different and for many taxpayers, given the increase in value of Canadian real estate, may give rise to an unpleasant surprise. For U.S. purposes, only the first $250,000 USD of gain on the sale of a principal residence is exempt from capital gains tax. For a married couple this exemption is $500,000 USD, but only if both taxpayers are U.S. persons. Amounts above the exemption will be subject to capital gains tax.
To calculate the gain for U.S. purposes, the proceeds from the sale are translated into U.S. dollars using the spot rate on the date of sale and the cost base is translated into U.S. dollars using the spot rate on the date of purchase. Using this method, any increase or decrease in the value of the U.S. dollar versus the Canadian dollar is also included with the sale.
Let’s take the example of Sam, who is a U.S. citizen resident in Canada. Sam purchased his principal residence in Canada and obtained a mortgage of $100,000 CAD when the Canadian dollar and U.S. dollar were at par (1 CAD = 1 USD). Therefore his mortgage was worth $100,000 CAD and $100,000 USD. He subsequently sold the property. At the time of disposition (and assuming he did not pay off any of the mortgage principal) the value of the Canadian dollar had decreased to 75 cents U.S. (1 CAD = .75 USD). At the time of discharge, his $100,000 CAD mortgage is now worth $75,000 USD. Because it takes fewer U.S. dollars to pay back his original obligation, the U.S. views this $25,000 foreign exchange difference as a taxable gain to Sam for U.S. income tax purposes.
This, of course, is a simplified example to illustrate the concept of a Foreign Mortgage Gain. The example does not take into account the principal on the mortgage that has been repaid by Sam, which is considered in an actual Foreign Mortgage Gain calculation.
The Foreign Mortgage Gain on a principal residence is considered foreign-source ordinary income and can be offset with foreign tax credits. The gain is allocated to the general foreign income basket, so if a taxpayer has sufficient accumulated excess foreign tax credits in this basket to offset the Foreign Mortgage Gain then no tax may be payable. A Foreign Mortgage Loss on a principal residence is considered a personal loss and is disallowed.
While technically a Foreign Mortgage Gain or Loss should be calculated on each mortgage payment made, the Internal Revenue Code states that a personal foreign exchange gain of $200 or less does not have to be reported. Therefore, in practice the Foreign Mortgage Gain calculations are not typically performed.
With the substantial rise in real estate values in most Canadian cities, we have seen many U.S. persons pay U.S. tax on the sale of their principal residence when they had assumed the sale would be tax-free. It’s important that U.S. persons become familiar with these rules and plan for any potential U.S. tax on the sale of their home.
Cadesky U.S. Tax is a full service advisory and compliance firm. We monitor U.S. tax news that may be of interest to our readers and share our thoughts in U.S. Tax Tips. If you require our assistance please do not hesitate to reach out to us.
The passing of the 2017 Tax Cuts and Jobs Act (TCJA) introduced many changes for taxpayers. Of significant importance for U.S. taxpayers abroad were the repatriation provisions under IRC §965 and the introduction of the new Global Intangible Low Taxed Income (GILTI) regime under IRC §951A. We have discussed and will continue to discuss these provisions as necessary.
These amounts are indexed for future years.
U.S. persons living abroad have always been taxable on their worldwide income. Conversely, by and large, they have always been able to claim worldwide expenses. The TCJA made changes as to what and how much housing expenses can be claimed as itemized deductions. Many taxpayers will find, that because of the increase in the standard deduction and the corresponding decrease in the ability to deduct certain itemized deductions (as discussed below), that they too will claim the standard deduction rather than itemizing.
Two of the most common itemized deductions relate to mortgage interest and real estate taxes.
with respect to any qualified resident of the taxpayer.
Acquisition indebtedness is defined as mortgage debt used to acquire, build, or substantially improve the taxpayer’s primary residence (or a designated second residence), and secured by that residence.
Historically taxpayers were able to deduct mortgage interest on up to US $1,000,000 of home acquisition indebtedness. As of January 1, 2018, taxpayers will be able to deduct the interest they pay on their mortgages up to US $750,000 in new mortgage debt. Married couples filing separately can claim up to US $375,000 each in mortgage interest deductions. This is a decrease of the former limit of $1 million for single filers and married couples filing jointly, and $500,000 for married couples filing separately.
In the short term, these changes only affect people who take out new purchase mortgages. Houses purchases that were under a binding written contact by December 15th and which closed by January 1, 2018 are also eligible for the $1,000,000 threshold. These changes sunset as of December 31, 2025 (unless Congress acts to make these changes permanent).
The TCJA also completely eliminated the deduction for interest paid on other home equity debt. Previously, taxpayers could deduct up to $100,000—$50,000 for married couples filing separately—on the interest payments for home equity loans and home equity lines of credit (HELOCs).
Example 1: In January 2018, a taxpayer takes out a $500,000 mortgage to purchase a main home with a fair market value of $800,000. In February 2018, the taxpayer takes out a $250,000 home equity loan to put an addition on the main home. Both loans are secured by the main home and the total does not exceed the cost of the home. Because the total amount of both loans does not exceed $750,000, all of the interest paid on the loans is deductible. Your mortgage interest deduction is not limited.
However, if the taxpayer used the home equity loan proceeds for personal expenses, such as paying off student loans and credit cards, then the interest on the home equity loan would not be deductible.
Example 2: In January 2018, a taxpayer takes out a $500,000 mortgage to purchase a main home. The loan is secured by the main home. In February 2018, the taxpayer takes out a $250,000 loan to purchase a vacation home. The loan is secured by the vacation home. Because the total amount of both mortgages does not exceed $750,000, all of the interest paid on both mortgages is deductible. Your mortgage interest deduction is not limited.
However, if the taxpayer took out a $250,000 home equity loan on the main home to purchase the vacation home, then the interest on the home equity loan would not be deductible.
Example 3: In January 2018, a taxpayer takes out a $500,000 mortgage to purchase a main home. The loan is secured by the main home. In February 2018, the taxpayer takes out a $500,000 loan to purchase a vacation home. The loan is secured by the vacation home. Because the total amount of both mortgages exceeds $750,000, not all of the interest paid on the mortgages is deductible. A percentage of the total interest paid is deductible (see IRS Publication 936). In other words, your mortgage interest deduction is limited.
There were two significant changes with respect to real estate taxes. First, the total of all state and local income taxes and property taxes are limited to a maximum of US $10,000. For many U.S. taxpayers who do not reside in the United States and who do not pay any U.S. state and local income tax this restriction just impacts their ability to deduct their property taxes. The second significant change, however, is that foreign property taxes are no longer eligible as an itemized deduction.
The ability for U.S. persons abroad to claim itemized deductions has been severely limited. As such, many taxpayers will just claim the increased standard deduction.
The term ‘foreign affiliate’ means a non-resident corporation in which the taxpayer has at least a 1% direct ownership interest, and at least a 10% combined ownership interest when considering the interest of the taxpayer and each person related to the taxpayer. A “controlled” foreign affiliate is a foreign affiliate that is controlled by the taxpayer or would be controlled by the taxpayer if the taxpayer owned all of the shares of the foreign affiliate that are held by four or less Canadian resident shareholders and persons who deal at non-arm’s length with the taxpayer or the other Canadian resident shareholders. In stacked company structures, only the lowest tier Canadian subsidiary is required to file Form T1134.
The foreign affiliate is deemed to be “dormant” – this is the case if the foreign affiliate had gross receipts of less than $25,000 in the year, and at no time in the year had assets with a total fair market value of more than $1 million.
The current filing deadline for Form T1134 is 15 months after the taxation year end of the reporting taxpayer. For example, the due date for the 2017 T1134 Form for an individual with a December 31 taxation year end will be due on March 31, 2019. However, as proposed in the 2018 Federal Budget, this deadline will be accelerated to allow the CRA to have the information sooner for their audit purposes. The new proposed deadline is 12 months after the taxation year end of the reporting taxpayer for taxation years beginning in 2020 and 10 months thereafter.
The purpose of the form is to require taxpayers to report various financial information regarding a foreign affiliate for CRA’s risk assessment purposes. For instance, Foreign Accrual Property Income or “FAPI” represents passive income earned by a controlled foreign affiliate, which is imputed and taxable in the hands of a Canadian resident shareholder as earned. Form T1134 provides a tracking mechanism for the CRA to match the information reported on the form to the income tax filings of such Canadian resident taxpayers.
It is important that Form T1134 be filed on time. The penalty for not filing this information return is $25 for each day late, to a maximum of $2,500 for each supplement that is required for a foreign affiliate.
There has been much in the news lately about the IRS collecting information about bank and financial accounts held overseas by U.S. persons. We thought this would be a good time to review what are the required disclosures for U.S. persons with offshore assets and what the U.S. is doing with this information.
U.S. persons who have an interest in (direct or indirect), signing authority, or any authority over non-U.S. financial accounts may be required to disclose that interest on FinCEN Form 114, “Report of Foreign Bank and Financial Accounts” or “FBAR”. If the aggregate value of all such interests exceeds US $10,000 at any time during the year then a timely filed FBAR is required. Note that this US $10,000 threshold is not per account but an aggregate threshold. It has been our experience that many taxpayers continue to think that the threshold is per account – that is clearly not the case!
The FBAR is due April 15th but taxpayers receive an automatic extension until October 15th. It is filed directly with FinCEN in the Department of the Treasury and is not part of an individual’s tax return. There are potentially significant penalties for non-compliance. Those found guilty of not filing due to willfulness (in other words they knew they had to file and for whatever reason, choose not to) are potentially subject to a penalty equal to the greater of (i) 50% of the account balance or (ii) US $100,000. Yes, the IRS has imposed these penalties! It is a significant tool the IRS uses when it goes after taxpayers charged with committing off-shore tax evasion.
For those who do not file, but their failure to file is not due to willfulness, they may be subject to a US $10,000 penalty. It has been our experience that this penalty is rarely assessed, however taxpayers cannot rely on what the IRS has done in the past.
The Foreign Account Tax Compliance Act (FATCA) was introduced as part of the Hiring Incentives to Restore Employment (HIRE) Act (P.L. 111-147). President Obama signed the bill into law on March 18, 2010.
One of the components of FACTA was the requirement for foreign financial institutions (i.e., Canadian banks and brokers) to disclose to the IRS information on their U.S. customers. The Canadian Department of Finance entered into an Intergovernmental Agreement (“IGA”) with the United States to allow for the enactment of FACTA within Canada. Under the IGA Canadian financial institutions will now disclose the required information to the CRA instead of sending it directly to the IRS. The CRA will, in turn, share that information with the IRS under the mutual information exchange agreement.
It is important to note that banks will only share information on non-registered accounts with a balance in excess of US $50,000. Registered accounts (such as RRSPs and TFSAs) are excluded from this reporting requirement. This greatly reduces the number of accounts subject to the IGA.
On January 23, 2019 the CBC issued an article (www.cbc.ca/news/politics/tax-facta-u-s-canada-1.4988135) stating that, under this agreement, the CRA has shared over 1.6 million banking records with the IRS since 2014. In 2017 alone, 600,000 banking records were shared. The number of individuals affected by this is much less, as many of the individuals had more than one account reported.
What is clear is that the ability to hide information from tax authorities is becoming harder to do. U.S. persons in Canada need to be understand what their filing and disclosure obligations are and to timely file these information returns. The IRS will take the information, they received from the CRA, and cross-check it against the returns the taxpayer has filed with the IRS.
Those who file their U.S. returns and tick the no box on Schedule B Part II, Foreign Accounts and Trusts, may be guilty of a willful violation if any accounts are not disclosed. As discussed above, the penalties can be quite onerous.
The staff and Cadesky US Tax can assist U.S. persons in determining what your foreign asset disclosure requirements are and can help prepare the necessary disclosure reports. Please contact us for further information.
On November 15, 2018 the IRS issued Revenue Procedure 2018-57. This Rev. Proc. outlines the indexed amounts and thresholds for the 2019 tax year. This includes the four tax tables: Table 1, IRC §1(j)(2)(A) – Married Individuals Filing Joint Returns and Surviving Spouses; Table 2, IRC §1(j)(2)(B) – Head of Households; Table 3, IRC §1(j)(2)(C) – Unmarried Individuals (Other than Surviving Spouses and Head of Households; and Table 4, IRC §1(j)(2)(D) – Married Individuals Filing Separate Returns. Cadesky U.S. Tax has put together a summary of those provisions that we feel are relevant for U.S. persons resident in Canada. Please check out our website at http://cadesky.tax/wp-content/uploads/2019/01/U.S.Personal.Income.Tax_.Rates-2019.pdf.
It should be noted that under the 2017 Tax Cuts and Jobs Act (TJCA) there is no deduction for a personal exemption amount for tax year 2019. In addition, there was a significant increase in the amount of the standard deduction, which was almost doubled. Many taxpayers who would have claimed itemized deductions in the past may now be better off claiming the standard deduction. While the 2017 TCJA significantly reduced U.S. corporate tax rates it only slightly reduced personal tax rates with the top marginal rate reduced to 37% from 39.6%.
Many of these changes will expire on December 31, 2025 as these provisions are subject to a sunset provision under the “Byrd Rule”.
Under the Byrd rule, the Senate is prohibited from considering an extraneous matter as part of a reconciliation bill or resolution or conference report thereon. Technically the 2017 Tax Cuts and Jobs Act was a reconciliation bill and hence is subject to the Byrd Rule. The Byrd rule is enforced when a Senator raises a point of order during consideration of a reconciliation bill or conference report. If the point of order is sustained, the offending title, provision or amendment is deemed stricken unless its proponent can muster a 3/5 (60) Senate majority vote to waive the rule. The Senate passed the 2017 TCJA by 51-48 so the 60 vote threshold was not met meaning that the Byrd rule was not waived.
At this point in time, it is unclear what the intent of Congress is with respect to making permanent many of these changes. Only time will tell.
The Canadian tax rates still remain substantially higher than the corresponding U.S. tax rates and brackets. As such for U.S. persons resident in Canada the change in the U.S. personal tax rates and the doubling of the standard deduction is a moot point. Canada dictates what their global tax would be. Lowering the effective overall U.S. tax rate will result, in most cases, in the creation of more excess foreign tax credits (which will probably expire unused). As such, such taxpayers may wish to forego claiming itemized deductions altogether to simplify their U.S. filings.
On December 20, 2018, just before the Congressional holiday recess, Congressman George Holding (Republican-North Carolina) introduced H.R. 7358, the “Tax Fairness for Americans Abroad Act of 2018”. This is one of two bills introduced by Congressman Holding, the other being H.R. 7373, the “Spam Calls Task Force Act of 2018”.
During the 114 Congress, Congressman Holding was a member of the House Ways and Means Committee which is the chief tax-writing committee in the House of Representatives. On November 6, 2018, Congressman Holding was elected with 51.38% of the popular vote, for U.S. House District 2.
For years, Congressman Holding has been a proponent of tax reform for Americans living and working overseas. He and his staff have been working on draft legislation since December 2017 when it became apparent that some form of residency-based taxation, for individuals, would not be included in the 2017 Tax Cuts and Jobs Act (“TCJA”). While the 2017 TCJA made changes to how corporations were taxed, no such residency based adjustments were made for U.S. citizens and residents, who continue to be taxable on their worldwide income.
Under the bill, nonresident US citizens who make an election to be taxed as a qualified nonresident citizen will exclude from income, and therefore be exempt from U.S. taxation on, their foreign source income including both foreign earned income and foreign unearned income. All nonresident US citizens, however, will remain subject to tax on any US source income. The bill would add Code Section 911A – “Alternative for Nonresident Citizens of the United States Living Abroad”.
In order to qualify for “qualified nonresident citizen status”, a U.S. citizen must be a nonresident U.S. citizen and make an election to be taxed as such. Individuals will make an election and establish that they meet certain foreign residency requirements.
is present in a foreign country or countries during at least 330 full days during such taxable year.
Will this Bill become law?
Anyone who follows U.S. politics will know how difficult it is, for what may be termed a private member’s bill, to become law. Proposed laws must be voted in and passed by both the House of Representatives and the United States Senate and then signed into law by the President. Those who remember the 2010 changes to the U.S. estate tax law will recall the vast number of bills that were proposed that ultimately went nowhere.
The U.S. Federal Government is currently shut down with no end in sight. The Democrats have retaken control of the House of Representatives and many Democrats are talking of impeaching President Trump. Other issues such as building a wall with Mexico, immigration reform and health care continue to dominate U.S. politics.
In her 2011 Annual Report to Congress, National Taxpayer Advocate Nina E. Olson cited (page 152 of Section 1) that there were between 5 to 7 million U.S. citizens living abroad. With the U.S. population at approximately 324 million (as of 2017) the number of U.S. citizens abroad represents, between, 1.54% to 2.16% of the U.S. population. While the issue of U.S. taxation is a significant issue to those U.S. citizens living abroad, in the general scheme of things the taxation of U.S. citizens abroad does not appear to of significantly high importance to either the U.S. Congress or the IRS.
As such, while the passing of the bill may provide tax relief and simplification to U.S. citizens abroad, it is doubtful that it will become law anytime soon. Essentially taxpayers shouldn’t get their hopes up.
The Tax Cuts and Jobs Act of 2017 (“TCJA” P.L. No. 115-97) significantly changed the interest deductibility rules for business interest expense for tax years beginning after December 31, 2017. As many businesses are coming to the close of their taxation year, it may be prudent to review how these changes will impact current year taxable income.
On November 27, 2018, Treasury and the IRS released proposed regulations (REG-106089-18). These proposed regulations addressed the business interest expense limitation under IRC §163(j) as amended. The proposed regulations provide guidance as to the application of IRC §163(j) to C Corporations, consolidated groups, pass-through entities (partnerships, LLCs and S-corporations), and foreign corporations.
The floor plan financing interest of such taxpayer for such taxable year.
Business interest expense would not include any other interest expense that is permanently disallowed as a deduction pursuant to another provision of the Internal Revenue Code. Any business interest expense which is not, currently, deductible, will be carried forward and treated as business interest expense paid or accrued in the succeeding taxable year.
Small businesses, however, are excluded from this limitation. IRC §163(j)(3) specifically provides that paragraph (1) does not apply to such taxpayer for such taxable year if they are under the gross receipts test of IRC §448(c). In general, a corporation or partnership will meet the gross receipts test, for any taxable year, if the average annual gross receipts of such entity for the 3-taxable year period ending with the taxable year, preceding the current year, does not exceed U.S. $25,000,000.
Given all the changes, and their respective implementation dates, taxpayers need to be cognizant of all the changes that the Tax Cuts and Jobs Act encompassed.
We at Cadesky U.S. Tax strive to keep our clients up to date on all relevant U.S. tax issues. If you have any questions or needs please do not hesitate to reach out to your Cadesky U.S. Tax team member.

References: §965
 §951
 §1
 §1
 §1
 §1
 §163
 §163
 §163
 §448