June,
July, August 1994
the
CEN-TAPEDE
david ingram's
(AMENDED Oct 29, 94) US TAX
INFORMATION - NEWSLETTER
In this
Issue:
1.
Selling US Property (NON RESIDENT ALIENS) Page 1
2.
Basis of US Property (Adjusted Cost Base) Page 2
3.
US Tax Law changes for 1994 Page 3
4.
Requirements to File for US Citizens living abroad Page 3
5.
You may be a US Citizen and NOT know it (Children born
before
May 24, 1934 of US Mothers added Oct, 1994) Page 4
SELLING UNITED STATES
PROPERTY
(WHEN YOU ARE A CANADIAN AND DO
NOT LIVE IN THE United States or have a "green card").
Over the
years, the United States has made many efforts to tax non-resident aliens.
It is easy to understand. Just as Americans left the country and made
investments in other countries and made a profit, many foreigners have made
investments in the US. If the investment is in bonds or stocks, or bank
accounts, or even gold, silver, or commodities, there are no penalties. But
when the investment is in real estate, the United States has a minimum tax
on ANY PROFIT. This minimum tax has not been enforced for most of the last
few years but they have started enforcing it now with a vengeance. I will
compare it to parking regulations where someone suddenly starts enforcing a
no parking zone. I actually have a 1992 specific letter from an IRS officer
stating that there is no minimum tax on the sale of real estate.
However, this
minimum tax started at 21% in 1987, 1988, 1989 and 1990, jumped to 24% for
1991 and 1992, and further increased to 26% for 1993 and 1994.
This tax
should be calculated on Form 6251. But the form (and my $4,000 US
Professional US computer tax program) does not show the calculation or even
suggest its existence. The information about the tax is found in detailed
instructions which do the calculation "off the form" and then plug
it in. It is not surprizing that most people miss it and then get the shock
of their lives when the IRS sends them a large bill that they did not
expect.
(There is no state tax return in the state of Washington but
as I write this newsletter, (Aug 3, 94), I have just been handed a letter
from the State of Vermont. This letter enforces Vermont Alternative Minimum
Tax on the sale of a property in Vermont).
In the last
week of July, I received the following situation by courier:
The client
and his wife had bought a piece of property in Whatcom County in the US.
When they
sold it in 1993, 10% of the sale price ($2,000 out of the $20,000 sale
price) was withheld and they were told that they would get this back by
filing a tax return. It is true that they would get it back if there was no
profit. They prepared their own returns and initially got back one of the
refunds but not the other. They should have left it alone (not really, but
you know what I mean). In following up and explaining the situation, someone
at the IRS came up with AMT and sent a bill for a total of about $3,640.
In this case,
there was a (figures are changed for ease of explanation) $14,000 profit and
instead of getting back their $2,000, the IRS has issued bills for another
$1,640 of tax (26% of $14,000).
BASIS OF PROPERTY (Adjusted Cost Base)
(for US purposes).
When calculating the profit
or loss on the sale of a US property, one must first determine the basis or
adjusted cost base of the property. The usual method is to take the purchase
price and add or subtract relevant amounts.
Examples of Increases to Basis (Additions to cost
price):
* An addition to the
property (new room, lift and put a basement underneath).
* Replacing an entire
roof.
* Paving a driveway, or
building a driveway, or an approach bridge or culvert.
* Installing central air
conditioning.
* Legal fees and closing
costs to purchase property.
* Survey costs, fencing,
digging or drilling a well.
* Installing septic tank
or alternative energy source.
* Rewiring building,
replumbing entire building.
* Assessments for local
improvements: water connections, sidewalks, roads.
* Casualty Losses -
restoring damaged property.
* Interest and taxes not
used as a deduction in other years (US only).
Examples of Decreases to Basis:
* Exclusion from income
of subsidies for energy conservation measures.
* Insurance
reimbursements.
* Casualty or theft loss
deductions.
* Easements (amount
received for granting an easement).
* Credit for qualified
electric vehicles, (amount of the credit).
* Gain from sale of old
home on which tax was postponed (family residence only).
* Residential Energy
Credit: Amount of the credit if the cost of the energy item was previously
added to the basis.
* Section 179 Deduction.
* Deduction for
clean-fuel vehicles and clean-fuel vehicle refuelling property.
* Depreciation: The
greater of the depreciation deduction which decreased your tax liability for
any year or the deduction you could have claimed under the depreciation
method selected.
* Corporate
distributions: Non-taxable amount.
US TAX LAW CHANGES EFFECTIVE FOR 1994
A. The self-employed health
insurance deduction is eliminated.
B. The $135,000 limitation
on earnings for medicare insurance has expired. The entire amount of
earnings above $400 is subject to 2.9% medicare insurance tax.
C. Business meals and
entertainment deductions are reduced to 50% of the amount spent from the
previous 80%.
D. CLUB DUES. No deduction
is allowed for amounts paid or incurred after 1993 for membership dues in
any club organized for business, pleasure, recreation, or other social
purposes. This includes business, social, athletic, luncheon, sporting,
airline, and hotel clubs.
E. TRAVEL EXPENSES. No
deduction is allowed for travel expenses paid or incurred after 1993 for a
spouse or dependent or other individual accompanying you on business travel
unless that person is your employee and the travel is for a bona fide
business purpose and would otherwise be deductible by that person.
F. TAXABLE SOCIAL SECURITY
BENEFITS. More of your benefits may be taxable in 1994. Beginning in 1994,
up to 85% of your Social Security may be taxable at different income levels.
G. CHARITABLE
CONTRIBUTIONS. Beginning in 1994, receipts must be produced for charitable
donations of more than $250.00 total.
H. MOVING EXPENSES.
Beginning in 1994, the move must be more than 50 miles (2 x's Canada's 25
miles). Meals, pre-move househunting expenses, temporary quarters, and real
estate expenses are no longer allowed. (Canada still allows temporary
quarters of 15 days and real estate expenses in old and new location).
I. RENTAL REAL ESTATE
LOSSES. Certain individuals who materially participate in real property
trades or businesses and who perform more than one-half of their personal
services and more than 750 hours of service in those trades or businesses
are not subject to the passive activity limitations.
But, I don't
want to be an American!
- #### The next paragraph
is a correction #### -
As the following page
shows, you may be an American by birth, or because your parents were and
have now spent a lot of time in the US. In other words, if your mother's
parents were Americans by birth or naturalization and one of them had lived
in the states at any time for any period, your mother is a US Citizen. If
she lived in the US for any period at all, and YOU were born between
05/24/34 and 01/12/41, and spent two years in the US before age 28 (for
instance, two years at Brigham Young University), you are a US citizen. If
you claim this birthright, you MUST file US tax returns. Similarly, since
you are a US citizen, if you have been physically present (trailer at Birch
Bay, Phoenix condominium) in the US for a few years (2 after age 14), and
you have a child born after November 13, 1986, that child is a US citizen.
Remember, "ANY"
US citizen living in Canada must continue to file a US return for as long as
they remain a US citizen even if "THEY HAVE NO US INCOME". If
you give up your citizenship to avoid this income tax, the IRS law still
gives them the right to tax you for income, gift, and estate tax for 10 more
years. If you die in this time, your executor is responsible to prove that
you did not give up your citizenship to avoid income, gift or estate tax.
GOOD LUCK!
I was awakened at 7 AM a
couple of days ago by a US lady from Kelowna whose husband had put a whole
lot of property in her name to escape Canadian income tax. She had reported
some $125,000 of Capital Gains in Canada of which $100,000 was free of
Canadian income tax because of the now cancelled $100,000 capital gains
exemption. However, she did not see a single cent of the money because her
husband had done all the deals, signed all the papers, and taken all the
money. They are now split and the money is gone now anyway in property deals
that didn't work out (money lost too late to carry losses back against past
profits). Now the US government wanted over $40,000 US in tax and penalties
on her CANADIAN capital gains.
Another place the problems
develop is with dividends from Canadian corporations. It is possible to have
$21,352 of actual ($26,690 grossed up) dividends from Canadian corporations
and not pay any tax to Canada because of our dividend tax credit. However,
when this money is reported to the US by the US citizen spouse (assuming no
difference in exchange) the Canadian resident finds themselves with a $2,500
(or so) US tax bill on Canadian Income. Showing again that anyone with a US
association, should only deal with a "PROVEN" US specialist when
it comes to making investments in mutual funds, stock, real estate, RRSP's,
and especially limited liability partnerships, (LLP's), etc. (see the Jan 94
issue of the CEN-TAPEDE for more information.
Remember, the CEN-TA
GROUP provides that information for real estate and other investments as
well as providing a property management service and US and Canadian tax
preparation service. Call George Hatton, CA for Mutual Fund and RRSP
Information; call Sonja Clark, CA, CPA, LLB for US / Canadian Corporate
Accounting; call David Ingram or D'Arcy von Schleinitz for US / Canadian Tax
personal tax preparation. (604) 681-1646. Marge Maddigan at 986-6253 for
property management.
david
ingram
NATURALIZATION
CHART
For determining whether LEGITIMATE CHILDREN BORN OUTSIDE THE U.S.
acquired U.S. citizenship at birth.
