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April 1997
the CEN-TAPEDE
david ingram's US/Canadian Newsletter April
15, 1997
TAX FILING
DEADLINES - U S and CANADA Page 241
NON-FILERS CAUGHT IN A WEB OF TAX BILLS Page 241
U S REQUIRES INDIVIDUAL TAXPAYER IDENTIFICATION NUMBERS Page 241
UNITED STATES ESTATE AND GIFT TAX RATES Page 242
DYING WITH AMERICAN PROPERTY (EVEN U.S. STOCK IN CANADA) Page 243
NEW SOCIAL SECURITY TAX RULES FOR 1997 Page 243
BLANK W-7 FORM TO GET YOUR ITIN Page 244
BLANK SS-4 APPLICATION FORM (U.S. EMPLOYER OR ESTATE) Page 247
June 16, 1996 is the filing deadline for U.S.
citizens (or green card holders out of the U.S.) and Canadians with non Dec
31/96 year ends to file their 1996 Canadian, American and state income tax
returns.
If you have not been filing your U.S. returns, be sure and catch up now.
Penalties are too large to ignore. Ask for the Sept 95 newsletter for
examples of U.S. enforcement methods. Ask for Oct 95 for the rules for U.S.
citizens living in Canada.
In the last week, one client arrived with a $27,000 1995 tax bill from
California after ignoring a letter from the California State Franchise Board
and another client arrived with a $67,000 1993 U S federal tax bill after
failing to file his 1993 and 1994 returns even though 1992 and 1995 had been
filed.
In the California case, the actual tax bill will be less than $1,300
"IF" California will accept a return. In the $67,000, federal
case, the actual tax bill is $20.00 "IF" the IRS will accept a
late return.
In both cases, the tax bills were largely based on gross stock sales through
U.S. stock brokers (Charles Schwab in both cases). What happened is that the
IRS obtained copies of all sales of stock and taxed on the gross sale
without allowing a deduction for the "cost" of the stock. This is
also what caused M L's $196,000 tax bill featured in the Oct 95 newsletter.
NEW REGULATIONS REQUIRE
INDIVIDUAL TAXPAYER IDENTIFICATION NUMBERS (ITIN or TIN) FOR U.S.
Up until February, 1996, it was relatively easy to get a United States
Social Security number if you needed it for bank accounts or to report
rental income in the United States. Filling out a one page SS5 form and
showing up at the Bellingham office of the Social Security Administration
was all that was necessary (you did need some identification). At that time,
the card issued would have "not valid for employment" stamped on
it and you had a number.
In February, 1996 this was stopped and individuals who needed a number to
report the sale of their summer home in Birch Bay or winter home in Florida
were told to file their tax return with no number and that the IRS would
issue a request for an SSN and one would be issued.
That has changed again. New regulations which seem to take effect on May 23,
1996 require that an individual MUST HAVE an "ITIN" BEFORE filing
their U.S. Tax return which means you must apply for the number quite a
while before filing the return.
"ITIN'S" will be required for some Estate Tax returns, Income Tax
Returns, and Gift Tax returns. This means that if you die owning U.S. stock
(could be in Canada) or a seasonal residence in the U.S., or a rental
property in the States, you better get your number now.
Apply on form W-7. Reg 301.6109-1(h)(1) requires that a foreign person
furnish an ITIN on a tax return filed after 1996. Applicants must supply
documentary evidence to establish their alien status. Examples of acceptable
evidence would be documents such as a passport, driver's licence, birth
certificate, identity cards, immigration documents, etc.
An ITIN is not a valid number for an individual who is in the U.S. with a
green card (resident alien status) or some other working visas such as a L1,
H2B, or TN (Treaty NAFTA) visa. This person must still obtain a legitimate
"working" Social Security Number.
Many individuals have one of the old Social security number cards which was
stamped "NOT VALID FOR EMPLOYMENT". In some cases, they found out
that all an American Employer wanted was "a number"; they never
wanted to see the actual card. As a consequence, there are people who have
been working illegally in the U.S. for 10, 20 or 30 years.
Those individuals should be aware that section 414 of the 1996 ILLEGAL ALIEN
AND LEGAL ALIEN RESPONSIBILITY ACT "requires" the IRS to report
aliens who report earnings against Social Security Numbers which do not
authorize employment. There will be severe penalties imposed including being
banned from the U.S. for up to 10 years.
Table for Computing U S
Gift & Estate Tax (from 709 US Gift Tax Return)
Column A Column B Column C Column D
Rates of tax
Taxable Taxable Tax on on excess
amount amount amount in over amount
over >> not over -- Column A in Column A
.......... 10,000 ........... 18%
10,000 20,000 1,800 20%
20,000 40,000 3,800 22%
40,000 60,000 8,200 24%
60,000 80,000 13,000 26%
80,000 100,000 18,200 28%
100,000 150,000 23,800 30%
150,000 250,000 38,800 32%
250,000 500,000 70,800 34%
500,000 750,000 155,800 37%
750,000 1,000,000 248,300 39%
1,000,000 1,250,000 345,800 41%
1,250,000 1,500,000 448,300 43%
1,500,000 2,000,000 555,800 45%
2,000,000 2,500,000 780,800 49%
2,500,000 3,000,000 1,025,800 53%
3,000,000 10,000,000 1,290,800 55%
10,000,000 21,040,000 5,140,800 60%
21,040,000 --------------- 11,764,800 55%
DYING WITH AMERICAN
PROPERTY
If you have up to $1,200,000 (U.S.) of publicly traded U.S. shares (Coca
Cola, PACTEL, AIRTOUCH, Kimberley Clark) in Canada, there is no U.S. estate
tax. However, if you have $15,000 motor home lot in Arizona and any amount
of U.S. stock, you have to deal with U.S. estate tax.
In general, the first $600,000 of a U.S. estate is exempt from U.S. estate
tax but this does not necessarily apply for non-residents.
It used to be that a non-resident was exempt up to $60,000. Under the new
law which took effect January 1, 1996 but was retroactive to Nov 10, 1988,
the exemption is calculated as a percentage of $600,000.
This amount is calculated by dividing the value of the U.S. property by the
total value of the estate and multiplying the result by $600,000.
Therefore, if one dies with a $100,000 condo in Florida and the total estate
is worth $500,000 U.S., the exemption is (($100,000/$500,000) x's $600,000 =
$120,000) $120,000.
And, if one dies with a $100,000 condo and the total estate is worth
$1,200,000 U.S., the exemption is "only" ((100,000/$1,200,000) x's
$600,000 = $48,000) $48,000 and $52,000 is subject to U.S. estate tax.
The estate tax is: $8,200 on the first $40,000 plus 24% of the next $8,000
($1,920) for a total of $10,120.00
If the estate was in California or another 42 states with estate tax, there
would also be a state estate tax as well.
WHEN ONE DIES with United States Property
If you are a U.S. citizen or a resident alien, your executor files a 706
Estate return for the assets at death and then your executor has to apply
for a U.S. employer number on an SS4 application (page 247). After he or she
has the number, the estate must file a 1041 estate tax return for the
earnings of the estate after death.
If you are a non-resident alien at death, then your executor will file a
706N for the assets held at death. The executor will then file a 1040NR to
deal with any income after death. The executor may have to apply for an ITIN
for the estate on a W-7 (see page 244).
SOCIAL SECURITY RULES
CHANGED AGAIN FOR 1997
After the debacle caused by the changes to Social Security taxation in
Canada which was introduced with the 1996 changes to the US / CANADA Tax
convention, I am pleased to see that the situation has changed. In 1996,
Social Security was taxed only in the United States. In 1997, it will go
back to pre 1996 rules and have 50% taxed in Canada for non-resident
non-citizen (of the U.S.) recipients. At the moment, there does not seem to
be any indication that it will be retroactive to 1996 but "STAY
TUNED", we will let you know soon. If you want the Social Security tax
rules for 1996, ask for the January, 1996 edition of the CEN-TAPEDE.
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