Living in another country does not exempt you from U.S. tax laws.
Are you an American citizen?
Do you live in Canada?
Do you think you are exempt from American taxes?
According to a recent The Globe and Mail article titled “Americans living in Canada: Be aware that the IRS is watching you,” you would be wrong.
The IRS still enforces taxes on Americans living abroad.
What are these tax rules?
Principal place of residence.
Did you sell your principal residence in Canada?
You will not be taxed on gains by the Canada Revenue Agency (CRA).
You will be taxed by the IRS on any portion of the gains exceeding $250,000.
Because the CRA does not tax this gain, you will have no foreign tax credits from this transaction available to offset the tax owed to the IRS.
Yikes!
Foreign accounts in the aggregate of $10,000.
Do you have a foreign bank account?
This could be a corporate, trust, or joint account.
If yes, you need to file a Report of Foreign Bank and Financial Accounts (FBAR).
If you do not, you could face severe repercussions.
U.S. gift and estate tax.
Your gift will be subject to gift taxes, above the annual gift exclusion amount of $15,000 per donee.
A "lifetime" amount is exempt up to $11.18 million in 2018.
You should be cautioned.
You could have U.S. estate tax liability in the future should you use this exemption, especially if the exemption is lowered down the road.
Life insurance.
If you are considering getting life insurance, you should understand the tax obligations.
When you die, the policy proceeds from a term policy are included in your gross estate calculations for estate tax purposes in the U.S.
If this brings your gross estate amount the exemption level, your estate may be taxable.
To get around this you could place your term life insurance policy in an irrevocable life insurance trust (and then live at least three years).
What happens if you get a Canadian whole life insurance policy?
Although this may be tax-exempt by the CRA, it may not be by the IRS.
You may owe taxes on the income earned inside the Canadian whole life policy.
Renunciation.
Can you renounce your U.S. citizenship to get out of paying these taxes the rest of your life?
Yes.
It can be a long and expensive process and can have its own complications.
How so?
The renunciation fee is $2,350.
Generally, you must show at least five years of tax-compliance in the U.S. before renunciation.
If not, you risk being deemed a “covered expatriate.”
If you are worth $2 million or more, you may also be considered a “covered expatriate.”
You may be able to avoid this outcome with careful tax planning.
You should talk to an experienced cross-border attorney if you are considering renouncing your United States citizenship.
Reference: Globe and Mail (September 19, 2018) “Americans living in Canada: Be aware that the IRS is watching you”
