Head of Household

[chadm]

It is my understanding that a US citizen living in Canada permanently with his NRA spouse and child can be "considered unmarried for head of household purposes" and use HOH filing status unless they elect to treat the NRA spouse as a resident alien for the whole year. Would the same situation apply to a married Canadian resident who works in the US? Can they claim HOH status under Article XXV Paragraph 1 of the Can/US tax treaty? Thanks

[nelsona]

Yes. For federal purposes you may chose to be HoH instaed of MFS.

This requires that you file a 1040 and report world income for the entire year.

Of course, since you are still Cdn resident (otherwise there would be no need to use the treaty, you would be resident of US entitled to HoH simply by IRS rules), it may be advantageous to you to simply use XXV(3), calculating a taxrate using a MFJ 1040 and applying this to your US income only on a 1040NR.

Your goal in either case should be only to reduce your US tax (incl. state and FICA) to a level just below your Cdn taxrate, otherwise you will simply end up owing more to CRA.

[chadm]

If I understand correctly I have 2 choices:

1) Under paragraph (1) the spouse with US income files HOH on form 1040 reporting world income even though both spouses are NR.

2) Under paragraph (3) file MFJ using 1040 rates and reporting US income only on 1040NR

Why are we reporting world income under option 1 above if both spouses are NRA and we are not electing to treat the other as resident?

If both our incomes are equal, would option 2 be advantageous?

Thanks

[nelsona]

You can only elect HoH if filing a full year 1040. You, as a Cdn national are electing to treat yourself as a US citizen living in Canada with an NRA spouse would.
A US citizen living in canada would file a 1040 HoH reporting their world income, thus so would you.


Just to correct your interpretation of option (2): You would file a 1040NR reporting only US income (typically only US wages). However your US wages would be taxed at a rate determined by preparing a pro forma MFJ 1040 on which you report all world income, but also use all available deductions and the MFJ tables. The RATE detrmined in this manner is then applied to the wage portion of your 1040NR.

And, of couse, you also have the option to simply file a1040NR, using the treaty, but you would use the 1040NR tables.

If both income were eqaual (yours from US hers from canada) it is possible that the rate determined on the 1040 MFJ could be higher than simply doing 1040NR or 1040 HoH, it would depend on the tax brackets.

[nelsona]

So you have 3 choices.

[nelsona]

Option 2 is most advantageous, of course, when the other spouse id not working at all. The more income the couple has that is not US wages decreases the benefit of the 1040MJF/1040NR option and makes the 1040NR and 1040 HoH more promising.

But, again, there is little to be gained in minimizing your US tax below your Cdn taxrate, as this puts you in line to haveto pay HUGE sum to canada while waiting for huge refund from IRS.

You simply want to use the simplest method which gets you below your Cdn tax: In order: 1040NR, 1040 MFS, 1040 HoH, 1040NR using XXV(3).

[nelsona]

And when I say "below your Cdn rate", that is after using all your normal "best-practice" cdn tax reduction techniques, like RRSP, 401(K), etc.

[chadm]

Assuming I am filing 1040 HOH, I presume I can itemize deductions instead of taking the std deduction. Am I required to disclose my treaty position? Any special form required for this?

Thanks again for your help.

[nelsona]

You can ALWAYS itemize. There are some instances where the standard deduction which is not permitted, but never the itemized.

[nelsona]

Are you facing a peculiar tax situation, since it is typically not necessary for a cdn resident with a working spouse to be very creative in reducing US tax below their Cdn amount.

[nelsona]

... and yes you would file 8833 to indicate treaty position

[chadm]

Nothing peculiar, just trying to minimize US tax.

In summary, if filing 1040 HoH, I would include world income, itemize or take standard deduction, and include Form 8833 disclosing treaty position i.e. Article XXV (1). I just need to reduce US tax to a level just below Cdn tax.

Thanks for youra assistance.

[nelsona]

That is correct.

Note that some states do not accept this notion of HoH for non-residents, so your staste tax if any might hvae to be done differently.

[nelsona]

... and just to confirm, you do need to have a child to qualify HoH.

[chadm]

Thanks for your assistance and your prompt responses.