Question about cross-border kiddie tax

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oakweather
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Question about cross-border kiddie tax

Post by oakweather »

Two children (4 and 2) who are US citizen as well as Canadian residents
If they hold their own accounts (e.g. U.S. treasury bonds) generating about $1-3k of passive income, I am writing to find out about cross-border kiddie tax situation.

Based on my research, on the Canadian side, the children need not file income tax returns as long as their combined annual passive and earned incomes are below their personal amounts. Please correct me if this is incorrect.

On the U.S. side, the children need not file income tax returns as long as their passive incomes are below $1,150 per child. Between $1,150-$2,300 per child, they are taxed at a reduced rate. Above $2,300 per child, it is at the marginal the rate of the parent(s). Please correct me if this is incorrect.

I also remember reading somewhere that if there is more than one child, then in determining the $1,150 and $2,300 threshold with respect to U.S. IRS taxes, we need to combine their passive incomes (i.e. if there are two children, then the respective tax-free and reduced marginal tax rate thresholds are reduced to $575 and $1,150 per child respectively by dividing the actual threshold by two children). But I can't seem to find this reference. Can anyone confirm or deny?

Thank you!
ND
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Re: Question about cross-border kiddie tax

Post by ND »

There are circumstances where kids' “unearned income” will instead be subject to trust income tax rates meaning that taxable income exceeding $12,500 (or so) will be taxed at the top rate of 37 percent.

Under superseded law, under the “kiddie tax” rules, certain children are taxed at their parents' highest tax rate on the child's unearned income over $1,900 for 2012 and $2,000 for 2013, as calculated based on inflation-adjusted CPI amounts, if that tax is higher than what the child would otherwise pay on it. The parents can, if certain conditions are met, elect to include the child's gross income on their own return.

A child is subject to the kiddie tax if: (1) the child either (a) is under age 18 at the end of the tax year, or (b) is age 18, or 19-23 if a full-time student, at the end of the tax year and his earned income doesn't exceed one-half of his support; (2) either parent is alive at the end of the tax year; (3) the child doesn't file a joint return for the tax year; and (4) the child's unearned income is more than $1,900 for 2012 ($2,000 for 2013 as calculated based on inflation-adjusted CPI amounts).
nelsona
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Re: Question about cross-border kiddie tax

Post by nelsona »

Be careful of CRA attribution rules. make sure you can prove to CRA that the initial investment it is THEIR money, not money you gave to them (while living in Canada). Otherwise the interest is taxed in your hands. Given their age, that might be difficult to prove.
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nelsona
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Re: Question about cross-border kiddie tax

Post by nelsona »

Oakweather,
The taxation of kiddie income based on trust rates had been repealed, so currently the kiddie tax is pretty much as you described in your post.

But remember that Cdn residents are not taxable in US on interest, and you are only reporting the interest becaue they are US citizens. You can re-source the income by treaty on their tax return, to reduce the US tax to zero, if they have paid Cdn taxes.

The only problem is if YOU are paying the tax due to attribution rules. That may not give rise to a credit on their US return.
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nelsona
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Re: Question about cross-border kiddie tax

Post by nelsona »

So, since you are likely taxable on this income in canada, I would elect to include it on your US return, and then re-source to Canada based on the treasty, and reduce the US tax to zero.

There would be no limit on interest income.

I presume YOU are a US filer?
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nelsona
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Re: Question about cross-border kiddie tax

Post by nelsona »

If you are NOT a US resident, I believe you can still elect to report it on a 1040NR, but, again, interst is zero-rate taxed in US for Cdn residents, so you would report in on the NEC page at 0%.

So, really the only tax you are concerned about is the Cdn tax you owe due to attribution.
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oakweather
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Re: Question about cross-border kiddie tax

Post by oakweather »

Nelsona - In this case, one of the parents is a US citizen and not a Canadian resident. The other parent is not a US citizen and is a Canadian resident. U.S. filing status is MFS. Does this change any of the situation you described above?
nelsona
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Re: Question about cross-border kiddie tax

Post by nelsona »

It shouldn't. Kiddie income can be reported on a 1040 or 1040NR, so it need not be an MFJ return.
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nelsona
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Re: Question about cross-border kiddie tax

Post by nelsona »

So, what is the situation regarding CRA? Is the income taxable to you?
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oakweather
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Re: Question about cross-border kiddie tax

Post by oakweather »

>> So, what is the situation regarding CRA? Is the income taxable to you?

Not sure what you mean by "income"? The income source from which the federal bond is bought? (it comes from our savings) Or the income from the bond itself? The non-resident parent (who gifts the money to the toddlers to purchase the federal bond) generally does not file a tax return with the CRA unless there is Canadian source income.

Thank you
nelsona
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Re: Question about cross-border kiddie tax

Post by nelsona »

For CRA purposes, If the parent supplied the FUNDS to purchase the investment, then the parent must report the interest and dividend INCOME (not cap gains) on that income. It does not matter if the income is Cdn or foreign-sourced.

For IRS purposes, who gave the FUNDS is not important, the INCOME is taxed in the child's hands, subject to the limits of the kiddie taxed rules, which you correctly described in your opening post, or the parent (either parent) can choose to report the entire income instead of the child. Then, the treaty provision (combined with IRS regulation) that forgives foreign residents from tax on interest comes into play.

So, as I said, whomever of the two parents report the tax in Canada, should report the income on their US tax return, with end result of no tax paid in US.
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nelsona
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Re: Question about cross-border kiddie tax

Post by nelsona »

btw, since CRA requires the cash method to be used in reporting interest, you should use the same method of interest reporting on the 1040s, rather than the accrual metrhod.
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oakweather
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Re: Question about cross-border kiddie tax

Post by oakweather »

Thank you nelsona. To ensure that I understand things correctly -

From the CRA perspective, the interest gains are taxable at the gifting parent's rate. If such a parent is not ordinarily resident in Canada or file Canadian tax returns, then by virtue of his/her child living in Canada, this is considered the parent's Canada sourced taxable income, in this case the parent should file a non-resident tax return with the CRA reporting the interest income and taxed at the non-resident's marginal tax rate.

I do have a question about cash/accrual. While the gains are not realized until redemption for such bonds, my understanding is that CRA requires accrual method (year by year taxation on the gains as if realized that calendar year). IRS on the other hand allows the filer to choose accrual or cash. Am I wrong in this regard?

Thank you!
nelsona
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Re: Question about cross-border kiddie tax

Post by nelsona »

So, you need to provide accurate information when posting. You stated that children live in Canada. Does that mean the parents (or one of them) do not?

You keep adding complexities that could have been mentioned at the beginning. You have left out important information that would have gotten you better answers, sooner.

Cdn interest is not taxable to US residents.

I'm going to leave this thread for others at this point.
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