Bad news about the "Net Investment Income Tax"

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MGeorge
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Joined: Fri Jun 22, 2012 9:23 am
Location: Canada

Bad news about the "Net Investment Income Tax"

Post by MGeorge »

Hello all,

I just read the instructions for form 8960 (the form used to calculated the 3.8% net investment income tax or NIIT).
It was discussed in other threads that a USC in Canada, married to an NRA spouse with kids could file as "Head of Household" to have the NIIT tax threshold increased to $200,000 instead of the "married filing separately" threshold of $125,000. The rules say clearing that any USC with an NRA spouse will be treated as "married filing separately" for NIIT purposes. It is still possible to file jointly with an NRA spouse for the $250,000 threshold.

The instructions practically underline that foreign tax credits will never offset this tax - you can't even deduct foreign taxes if there is a 1116 in your return.

This is a raw deal for a few people in Canada. Does anyone have any ideas, other than pretending you're single or "common law"?
nelsona
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Post by nelsona »

many 1000's have expatriated for a lot less.
Of course one could put all their investemnts in NRA spouse's name.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
nanic
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Joined: Mon Nov 21, 2011 2:26 pm

Post by nanic »

Yes but the Q&A says: A dual-resident individual, within the meaning of regulation §301.7701(b)-7(a)(1), who determines that he or she is a resident of a foreign country for tax purposes pursuant to an income tax treaty between the United States and that foreign country and claims benefits of the treaty as a nonresident of the United States is considered a NRA for purposes of the NIIT.

Does this mean we can use the treaty to be exempt such as double taxation?
MGeorge
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Location: Canada

Post by MGeorge »

Hi nanic,

I believe a "dual-resident individual" is a non-USC who may have lived in the US for part of the year. A USC can't be a dual-resident individual.
nanic
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Joined: Mon Nov 21, 2011 2:26 pm

Post by nanic »

Yes but I wonder if there is something else in the tax treaty that could be used for exemption? Will have to check.
MGeorge
Posts: 313
Joined: Fri Jun 22, 2012 9:23 am
Location: Canada

Post by MGeorge »

It doesn't sound like the treaty will help here.
Oh how I would like to read "Non-residents who are US citizens will be treated like non-resident aliens for the purposes of the NIIT"
They keep going on about how the NIIT is imposed under chapter 2A, and therefore is completely separate and parallel from the usual tax system. This would be a great time to make chapter 2A residence-based. I know, I'm dreaming...
nelsona
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Post by nelsona »

The only possible relief I see is by using a combo of para 3 and 4 of article XXIV, which basically states that any tax that a US citizen pays on US-sourced income, which would not be paid but by the fact that he is a US citizen, is (a) denied a tax credit in canada, BUT (b) SHALL be credited on thier US return.

We have all known this as the re-sourced by treaty provision of 1116, but note that para 4(b) does not state that the credit be dome in accord with current US law (ie 1116), as it does in the opening paragraphs of that article. It simply states thata US "SHALL credit".

So, I suppose that one could maneouver finances such that the income that gives rise to NIIT be considered US source by paragraph 3, in which case paragraph 4 can be applied.

The question then becomes: what income give rise to the NIIT? Is it the investemnt income? Or is it the income that put one above the NIIT threshold?
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
nelsona
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Post by nelsona »

I let you guys ponder that a spell.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
MGeorge
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Joined: Fri Jun 22, 2012 9:23 am
Location: Canada

Post by MGeorge »

Thanks nelsona - I think I follow you. I will have a look into this further.
nanic
Posts: 55
Joined: Mon Nov 21, 2011 2:26 pm

Post by nanic »

Yes thanks Nelsona. Something to think about.
marcharry
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Joined: Wed Sep 23, 2009 10:45 am

Post by marcharry »

Having just sent off a cheque to the IRS for $600 resulting from f8960 - they have my attention:

Are withholding taxes paid on US-based investments (ETFs) applicable anywhere on the form? (Of course I take the ftc - but withholding is paid to the US)

Do you think that those taxes paid to the US can be recovered on the canadian return for 2014 tax year?

What are the big implications of this?

Any renunciation would be deemed disposition and subject to NII?

Are there others?
nelsona
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Post by nelsona »

Som background plese:
Who is withholding the funds and for what purpose?
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
marcharry
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Post by marcharry »

[quote="nelsona"]Som background plese:
Who is withholding the funds and for what purpose?[/quote]

Withholding tax of 15% is applied to interest and dividends of US domiciled securities - in this case Exchange Traded Funds. This is applied by the broker (Waterhouse) and remitted to the IRS. Of course this applies to foreign accounts only (outside usa).

These taxes are credited (sort of) on the cdn return to avoid double taxation.
nelsona
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Post by nelsona »

Marcharry,
Since these are taxes remitted to IRS, and you are filing a US tax return, then of course these get included in your withheld tax on 1040, line 62.

Since the withheld tax is not your final payment, you need to complete your US tax return before you can determine what the US tax on those dividends are, you cannot simply use the tax that was withheld, since your US tax rate should ne MUCH lower than this. You would prorate your income and tax to determine your effective tax rate, and then use this rate on the US dividend income included on your CDn return.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
marcharry
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Joined: Wed Sep 23, 2009 10:45 am

Post by marcharry »

Thanks for your input. I think I see what the problem is here.

I have a W8 BEN on file with the broker and I should have a W-9 for us citizens. Presumably, having a w-9 triggers the issuance of a 1099 that can go on line 62 as tax withheld. Do you know if that is the case.

Do you think the tax would actually be refunded, given that the ftc would wipe out the basic amount owed?
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