Moved to the US Permanently, tax question

[JasonR]

My Wife and I moved to the US in 2012. I am a dual US/Canadian citizen and my wife is Canadian. By the end of 2012 we had secured her green card. So she now has her permanent resident status and earlier this year we got her a social security number.

My wife still works for her Canadian employer on a part time contract basis. She does graphic design for them from our home here in the US. She is no longer considered an employee and they are not doing any at source deductions for her. She submits an invoice for her time and they pay her via a direct deposit to our Canadian bank account.

I no longer have any ties to Canada (other than a bank account) and am working full time for a US employer. For 2012 taxes (that being this past tax year, which was just recently filed) we hired an account to handle the transition, to make sure all the exemptions, etc were handled properly. In 2012 we liquidated all our RRSPs as well, so all we have now in Canada is a checking account that my wife gets paid in and we wire the money down here. We first filed our Canadian taxes, indicating when we left the country and that we are non-residents. We reported all our income for the time in Canada, as well as for the RRSPs we sold, etc. We then provided all that information to our US accountant who handled the US taxes. He is still in the process of completing them, we ended up needing to file an extension due to the complexity.

Hiring an account to do all this was not cheap. I've used the accountant before to do my US taxes while I was in Canada, but I was handling my own Canadian taxes. For the 2013 tax year (which will be filed in 2014) I would like to be able to do our own US taxes and not need to hire someone. From what I understand, now that we have left Canada, we no longer need to file Canadian taxes, which will make the process a lot simpler. However, with my wife's current situation, does that still hold true for her? Does the fact that she is being paid into a Canadian bank account have any affect, or is that not even a factor we need to worry about? Are there any steps we should take, or adjustments to her situation that would be wise to make, in order to make this happen?

Any help would be appreciated!
Jason

[nelsona]

First, lets look at your 2012 tax returns.

Canada: both of you should have returns on which you puta departure date, and only income from before that date wos put on. Nothing from after that date, excepy WAGES (T4 wages) earned after she left. Her contractor payemnts are not subject to Cdn tax.

US: you should have a FULL 1040 married filing jointly, on which ALL yor 2012 income shoul;d be included, even the Cdn income, for both of you. You should also have form 8891's for your RRSPs, and an FBAR form for all your foreign accounts, even the ones that were closed in 2012. Since you are reporting Cdn income on this return, you should have either form 2555 to exclude your Cdn wages (from before the move) and/or form 1116 for any other Cdn-source income. There should be some minor income form your RRSP reported on line 16b of your 1040, and the 25% tax you paid in Canada should be included somewhere, either on form 1116 or on schedule A.

[JasonR]

So the first mistake I see we made was including my wife's contract work she did after the indicated departure date as income in Canada. Of course because that was income with no deductions, we owed tax on it. Our returns are still currently processing with the CRA, however, the check we sent with the amount we owed was cashed right away.

At this point do we need to file an amendment for her return? Which is basically going to say, oops all that self employment money we said she made, she actually didn't...how is that going to go over?

US taxes we have an extension on and time to make adjustments. I don't see any glaring issues with them, I think we did everything right, except that the income my wife made after we moved should be on the US return and not the Canadian return.

[nelsona]

Just to be perfectly correct, the income from her contract should be reported as self-employemnt income. BUT, should then be deducted at line 256 as it is exempt by treaty. The effect is to not have to pay Cdn tax on it.

Just to make it clear for your US return, ALL her income has to appear on it, not just the income from after the move. Then both you and her can exclude your wages using 2555. If you do not report her full world income for 2012, you cannot file a joint 1040 return.

Your 1116 forms should include her RRSP tax, and can wtrite off against her contract work. This will reduce your US tax astronomically. This is a little known fact tha 99% of even the most proficient cross-border types are unaware.

In any event it doesn't look like you are getting your money's worth from the CPA.

[JasonR]

Thanks for your help nelsona.

So for the years going forward, like when we file taxes for the 2013 tax year. Will we need to file a Canadian return for my wife and indicate the income she earned and add the tax treaty exemption deduction? Or since for the 2012 tax year we indicated that we left Canada, we no longer need to file Canadian returns (thats what I'm hoping for).

Thanks for your advice,
Jason

[nelsona]

As long as she is performing her work in US, there is nothing to report.

If she does work in Canada, then she and the firm would either have to have 15% of the earning for those times withheld, or get a "105" waiver. Since the firm isn't withholding anyways, it is unlikey that she would even need this.

Ultimately, unless she would spend more than 6 months in canada during any 12-month period, she would not be taxable on this income, and would merely file to prove it (oand get any tax withheld).