No matter where they live or how their money is earned, all US citizens and those with green cards must file US federal tax returns and pay taxes to the IRS. The good news is that you can claim IRS provisions to reduce double taxes. Don’t stress over US Tax For Us Citizens Living Abroad, we at US Expat taxes are here to help you.
There are various methods for Americans residing in Canada to pay less US taxes, frequently nil. The Foreign Earned Income Exclusion, which exempts the first approximately $110,000 from US income tax if you can show that you are a resident of Canada, and the Foreign Tax Credit, which gives you a US dollar tax credit for the equivalent amount of tax that you have already paid in Canada, are the two main ones.
If you pay more income tax in Canada than you would have to in the US, the Foreign Tax Credit is usually a better choice since you can carry the extra US tax credits forward for future use.However, as both of these IRS provisions must be claimed by submitting the appropriate form, you still need to file a US tax return even if your income is higher than the aforementioned minimal IRS levels.
A tax agreement between Canada and the US was established in 1980 and has subsequently undergone four revisions. A clause in the tax treaty that permits information exchange and collaboration between the two governments in tax collection is one of its provisions. The treaty also specifies which income is taxed to which countries and which income is exempt. For people and businesses involved in international trade, this is extremely crucial. The pact also covers the IRS credit for foreign taxes that US citizens and permanent residents receive when paying Canadian taxes on their US expat taxes.
The United States and Canada Tax Treaty prevents double taxation on income and capital gains, however, the advantage is only available to Americans living abroad in Canada owing to a Savings Clause.
Americans living in Canada can offset their US income taxes paid to the IRS with Canadian tax credits for income earned in the US.
Expats must submit form 1116 together with their federal tax return to collect US tax credits against any Canadian taxes they have already paid. By doing this, the great majority of US citizens living abroad in Canada will avoid having to pay US income taxes.
A provision in the US-Canada Tax Treaty permits the Canadian government to provide IRS information on US expats’ Canadian taxes as well as the balances of their Canadian bank and investment accounts.
Furthermore, penalties for failing to file US federal returns, particularly FBARs, can be severe, and the Canadian government has the authority to collect fines on behalf of the IRS.
Expats should utilise IRS form 8833 to claim a provision of the United States-Canada Tax Treaty other than claiming US tax credits.
US citizens living in Canada can avoid paying social security taxes to both the US and Canadian governments by entering into a separate arrangement known as a totalization agreement. Contributions made by expats while they were in Canada might be credited to either system. Depending on how long they want to be in Canada, they must choose which nation to pay.
We advise you to get in touch with an expat tax expert if you have any queries or inquiries concerning your tax filing position as an American residing in Canada.