Taxation of Income from Joint Accounts: U.S. vs. Canada

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eeyore
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Taxation of Income from Joint Accounts: U.S. vs. Canada

Post by eeyore »

I just got off the phone with the International Tax Services help line (267-941-1000, as given by http://www.irs.gov/uac/Contact-My-Local ... nationally).

I asked about taxation on joint accounts where such accounts are owned jointly by a husband and wife. They said that, for married filing separately, each tax return should report 50% of the income from each joint account on each tax return. The source of the income is irrelevant. Is that correct?

In Canada, we must report the income to the CRA based on the source of the income. Although we might have joint accounts for estate planning purposes, if a given joint account contains income from only one spouse, only that spouse must report the income.

So does this guy from the IRS International Services office know what he's talking about?

Thanks for any help you can give.
nelsona
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Post by nelsona »

You are correct about how CRA treats joint accounts. Income earned is proportional to the amount input by each accountholder.

As to IRS, they defer to the rules of your state community property laws.
Community propoerty: 50-50 applies.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
eeyore
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Post by eeyore »

Do you know whether the 50-50 IRS rule applies to U.S. persons living in Canada?

If so, the solution is to simply take the U.S. person off the accounts?
nelsona
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Post by nelsona »

Canada is community property as far as I know.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
tdott
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Post by tdott »

[quote="nelsona"]Canada is community property as far as I know.[/quote]

Does that mean that when filling in form 8854, one can just total up the husband-wife net worth and divide by 2 to arrive at the renunciant's net worth?
graubart
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Post by graubart »

If the IRS defers to the rules of the state where you live then they should accept the CRA rule.
rlb
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Post by rlb »

tdott, re form 8854. Nope. Not, at least, according to Phil Hodgen's presentations. You can divide by two on joint accounts, I believe. But a husband's IRA goes all on his net worth; the present value of any pension plan of the husband goes only on his net worth; any other assets owned only by him only on his net worth; and similarly for the wife of course. However, the wealthier spouse can gift assets to the less wealthy spouse to balance things, such as cash, investments, etc. (However, you will have attribution issues in Canada to keep track of on any income earned by the gifted assets.)
tdott
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Post by tdott »

[quote="rlb"]tdott, re form 8854. Nope. Not, at least, according to Phil Hodgen's presentations. ... [/quote]

I'm not so sure, Phil Hodgen seems to say that you can divide community property here: http://hodgen.com/community-property-an ... nce-sheet/
nelsona
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Post by nelsona »

rlb, hodgsen's post coincides exactly with what we have said: for IRS purposes, joint community property is split evenly.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
rlb
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Post by rlb »

nesona, I think I will exit the discussion at this point. My wife and I are struggling with these issues right now as we decide whether to renounce US citizenship. I do not know whether "Canada" is close enough to a community property state to just assume you can divide property 50/50. I do know that marital property laws are enacted separately in each province, so you would have to check the province in which you reside carefully. Some property is not generally considered marital property (property owned before the marriage, inheritances), while a house may be marital property even if owned totally by one spouse before the marriage. Even in the US, if you acquire property during the marriage while living in a non-community property state, and subsequently move to a community property state, I believe that property may not be considered community property unless there is a triggering event (death, divorce) while in the community property state. If you move from a non-community property state in the US to a Canadian province that has community-property-like laws, what happens?

Hodgen suggests a path forward in the article quoted, involving an written agreement between the spouses which would allow a 50/50 division on 8854. However, it might trigger the need for a gift tax return. Would Canada's attribution rules be invoked in any way?

In our case, we are going to get expert advice on getting this right, as the consequences of a disaster would be too high. We want and need both of us to be non-covered expatriates. It is not just the exit tax (pretty reasonable, actually, except for taxing pensions in advance, and quite analogous to Canada's deemed disposition on emigrating), but if you are a covered expatriate and bequeath inheritances to US citizens (our children), they will pay heavy inheritance taxes, while if you are not covered expatriates, there will be no US tax at all (just file 3520).

My suggestion here is not to go it alone if you need to equalize property substantially. Phil is holding a web class later in the year to guide folks through the 8854 form as a group, intended only for those who can arrange to be non-covered expatriates.
nelsona
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Post by nelsona »

good idea rlb.
But I would not be too worried about estate tax. Anything that your children inherit will already be heavily taxed in your estate by canada (since it will all be deemed sold) that any estate tax (large or small) would be more than covered by that.

What one generally has to worry about is what the non-US spouse inherits. If you are neithger or both USC's then no worries.

I'm definitely not a proponent of expatriation, but it has its (only) merits for long-term simplicity (bot not for income taxation and certainly not for estate taxation issues.)
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
exPenn
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Post by exPenn »

To go back to the original topic of this thread, which was how to report interest on Joint accounts for US tax pruposes. My wife is a USC living in Canada and I am a non-USC. Most of our investments are held jointly to avoid probate fees. We have been reporting the interest on joint accounts on my wife's US tax returns in the same way they were reported on her Canadian return, i.e. attributed to the person who made the investment. In our case, to minimize Canadian taxes, we arranged our investments so that most of them could be attributed to the lower income spouse (my wife). (Nothing in the CRA rules says that the lower income spouse cannot put all her income into savings and investments while the higher income spouse pays all the household expenses). Therefore, if we were to report only 50% of interest on joint accounts on her US tax return, she would actually have LESS investment income than we reported (she would not owe US taxes in either case). Therefore, even if we have been doing it wrong all this time, there would seem to be no compelling case for going back and changing it now. Comments?
nelsona
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Post by nelsona »

IRS doesn't care if you OVERreport your income.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
eeyore
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Post by eeyore »

exPenn:

In another thread (http://forums.serbinski.com/viewtopic.php?t=8370), Dalthien provided an interesting link that suggests that IRS sometimes decides that joint accounts should not be taxed 50-50 (http://www.woodllp.com/Publications/Art ... counts.pdf). The article's authors provide the example of a joint account where one account holder is on the account only to act as an agent of the other. The element in common with accounts joint with spouse for estate planning is that, in both cases, one party is on the account for a different reason other than "current ownership" of the funds. (I suppose to formalize this understanding might require a legal document saying so, however.)

Because our situation is similar to yours (joint accounts for estate planning only), I phoned one of the authors of the above article to ask for his views, since our scenario was not specifically mentioned in the article. He said that the "safest" approach would be to report income from the joint accounts 50-50 to the IRS (as suggested by nelsona), since that is the default position of the IRS. He said that we might be able to document contributions, etc., to support our position that these accounts should not be taxed 50-50, but it would be far safer to assume IRS's default position, then let them tell us if they see it otherwise.

I also asked him about what should be reported on Form 8938 (the question posed on the other thread above). He suggested that it would be best to report all accounts on which the U.S. person is a joint owner, regardless of who contributed. His rationale is that it's better to over-report than run the risk of under-reporting.

So our practice will be to follow this advice by reporting this income 50-50 to IRS and putting all the joint accounts on 8938. For us it will make no difference in terms of taxes payable to IRS, since there's no tax owing whether reported 50-50 or not (until now and in the foreseeable future). The instructions for Form 8938 imply that any income earned by the accounts listed on 8938 will appear on the U.S. person's tax return as reported income. That seems consistent with the suggested approach. And with the implementation of FATCA, it seems all the more reason to ensure that all joint accounts are reported to the IRS, since to do otherwise will likely just invite scrutiny.
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