Tax tips when moving to the U.S.

It’s been almost a month since the last time I posted anything, and while the reasons are varied, one definite contributing factor is that it was tax time.  Twice, actually, since I had to file a return in both the U.S. and Canada.  This isn’t the first time I’ve moved across the border (though I was considerably more ignorant the last time), and now seems as good a time as any to note what I learned – some parts via reading and planning in advance, and the rest via sometimes unfortunate after-the-fact discoveries.

Disclaimer – I’m not an accountant, lawyer, tax professional, or even astute in these matters. I might be arrested and thrown in jail by both Revenue Canada and the IRS once they process my returns this year, for all I know. Treat everything here as a pointer to go do your own reading!

1.  Make sure you’re a [deemed] non-resident!  If Canada deems you to be a resident, it will tax you on your world income as opposed to just the income you earn in Canada. Since Canadian tax rates are substantially higher than the U.S., it’s strongly in your interest to ensure that Canada doesn’t deem you a resident. You can read more here and also on this page, but what’s important is ensuring you don’t have residential ties.  Having a home, spouse/dependents, or car in Canada can all trigger deemed residency. So be careful!

2. Sell Everything (and bring the proceeds to the U.S.). While you don’t want a home or car due to #1, what I’m talking about here is any non-RRSP accounts & investments you might have. What I didn’t know the first time I moved back in 1999 is that Revenue Canada treats leaving the country as a deemed disposition of all your assets (like stocks, mutual funds, etc) even if you don’t actually sell them.  The IRS will similarly treat the purchase price for any investments you bring as the fair market value on the day you become a resident.  So tax-wise, it’s as if you sold everything – and it’s a lot easier if you actually do.  It was probably time to re-balance anyways, and you’ll probably also need more cash than you anticipate.

3. File an FBAR for your foreign accounts.  The IRS requires that you disclose foreign accounts if you have $10,000 or more in total abroad, using form TD F 90-22.1 (also called the FBAR).  You need to do this every year – and must report the peak value of the account for the year.  You have to file this separately from your tax return, and the penalties for not doing so are very severe – $10,000 minimum, possible jail time, and some sites indicate the penalty is actually 35-50% of the value of the foreign account.  Even if you’re just late!  This story indicates that penalties hit 50% even for a voluntary late filing; in this case, an 80-year old woman who inherited accounts she wasn’t fully aware of was hit with a $120,000 penalty.  So if you leave an RRSP or anything else in Canada, make sure you file or you risk losing a ton!

4. Make a Article XVIII(7) election on your RRSP.  Assuming you have enough in your RRSP that you’d like to maintain it, you need to file form 8891, or else the IRS will treat your RRSP account as taxable.  If you’re going to withdraw from your RRSP soon and will be in the U.S. when you do so, then it may be more complicated, so if you’re nearing retirement, consult an accountant.  If you’re still 20+ years out, make the election (it’s permanent), and you’ll only pay taxes on an actual distribution.  It’s hard to correctly file your US taxes if you don’t do this, because Canadian financial institutions don’t issue T3/T5 equivalents for RRSP accounts!

5. Disclose your foreign accounts again thanks to FATCA. Wait, what?  First an FBAR, then an 8891 for RRSP accounts, and now yet another form to the same organization about your accounts? The thresholds are different for FATCA, the time period it covers is different (in your year of arrival only), and what accounts are covered is also different. Seeing why #2 said “sell everything” so you could avoid this mess? Form 8938 is the one you need for this, though the threshold is much higher ($50,000 aggregate value). Note that RRSP accounts don’t need to be included, but due to IRS form bugs, you need to report form 8891 as if you had filed form 3520, at least in this years forms.

6. Get an ITIN for your dependents. We messed up on this one, and it had a $1,500 impact (which I’m hoping it’s possible to correct with an amended return later). As a newcomer to the U.S., you might naturally assume you should try and get your dependents a social security number. But if you’re on a visa, which is usually the case, you’ll discover that you can’t. What you might not realize to later is that there’s an Individual Taxpayer Identification Number (ITIN) that you can get (form here). From the name, you’d think this unnecessary – unless your 2 year old is fabulously more talented than our Leo, and is out there earning an income somehow. But you can’t claim tax credits for your dependents without an ITIN for them! So file for one as soon as you arrive and are getting your own SSN.

7. Beware Paperless Statements. Save the planet!  Think of the children! Switch to paperless statements! Really, how can you not go paperless with arguments like that? Paperless is probably still better than cutting down trees – but when you close your account, with many institutions, you can also lose access to the entire history of paperless statements you had for that account. So as you sell & close everything, make sure you’re capturing your transactions, cost basis, etc. – or you’ll be expending a lot more effort once you realize you need it at tax time. Like me.

8. Leave enough to pay Revenue Canada. While moving all your funds to the U.S. is a good idea for tax reasons, if you’ve held investments for a long time, make sure you have enough Canadian funds to pay Revenue Canada for capital gains taxes that you might have incurred as a result of selling all your investments (including deemed dispositions; see #2). You don’t want to be scrambling at the end of April to find a way to write a Canadian dollar check that Revenue Canada will be able to cash!

Again, use your own judgment and certainly don’t treat this list of things as comprehensive, but I thought it might help others avoid items they didn’t already know about! At least the upshot of this is that taxes in Washington are much lower than in Ontario!