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Impact of US Tax Reforms and How the Tax Cuts and Job Act of 2017 Affects Cross-Border Tax

Recently President Trump signed into law a new tax reform known as ‘The Tax Cuts and Job Act of 2017’. It is one of biggest overhauls of US taxation since 1986, and has far-reaching impact on both sides of the border. Canadians, including individuals and businesses who are tied to the US tax reform are major stakeholders, and these shifts in US taxation will affect the approach to cross-border tax structures and future planning.

By being prepared and well informed, we can most effectively position and adjust cross-border tax situations to your greater benefit. At Kaman Kwok Inc., our goal is to help you understand the implications and make informed responses to this pivotal new reform.

We have taken the full ‘Act’ and assessed it’s potential impact on Canadian individuals who file U.S. tax returns. We will provide some of the key highlights in a series of articles over the next few weeks.

Contact us if you have questions, or would like to set up a consultation with our tax specialists.

This week the focus is on some key impact areas related to Personal Tax:

Highlights of Personal Tax Changes:

Effective Date: Taxable years beginning January 1, 2018.

Sunset Date: Taxable years beginning after December 31, 2025.

Standard deduction – almost doubled.

In 2018, the standard deduction for individuals filing U.S. tax returns, and not electing to itemize deductions, increases from $6,350 to $12,000 for single filers. For married taxpayers filing jointly, and certain surviving spouses it increases from $12,700 to $24,000. For the head of household filers, it increases from $9,350 to $18,000. The amounts will be subject to inflation adjustments starting in 2019.

Tax rates – top rate reduced.

The Act reduces tax rates, moving the top marginal rate down to 37 percent from 39.6 for single filers with income over $500,000, and for married taxpayers filing jointly with income over $600,000. This rate structure is in force for 2018 taxable year and will revert back to 2017 rates in 2026.

With the Canadian combined federal/provincial top rate exceeding 50 percent in many provinces, the lower U.S. tax rates are of limited benefit to Canadian residents. This is because they ultimately pay the higher of the U.S. and Canadian taxes on that income.

Personal exemptions are eliminated and standard deductions increase.

The Act eliminates the ability of a taxpayer to take a personal exemption for each taxpayer and dependents claimed on the taxpayer’s return. Currently, each taxpayer can deduct $4,050 per person claimed on the taxpayer’s return. The Act further modifies the filing requirements for income tax returns through an increase in the standard deduction.

The following individuals are required to file income tax returns: (i) individuals with gross income for the taxable year in excess of $12,000; (ii) individuals (including certain surviving spouses) entitled to file a joint income tax return with gross income in excess of $24,000; and (iii) individuals filing as heads of household with a gross income in excess of $18,000.

This change may either increase or decrease U.S. taxes for U.S. citizens and green card holders living in Canada, depending on their circumstances.

Canadians who are nonresident aliens of the U.S. are currently eligible to claim personal exemptions but are ineligible to claim standard deductions. Therefore, they must itemize their deductions. The result of the elimination of personal exemptions and the itemized deduction may be that these taxpayers are subject to U.S. tax on income such as U.S. employment income and U.S. net rental income without the benefit of any offsetting deductions or exemptions at all.

Check back over the next few weeks as the tax specialist team at Kaman Kwok Inc present more insights on how The Tax Cuts and Job Acts 2017 affect your cross-border tax situation.

  • Principle Residence Exclusions

  • Estate and gift tax –doubling of exemption.

  • Alternative Minimum Tax – AMT

  • Mortgage Interest Deductions

  • Limitation on Losses for Taxpayers Other Than Corporations

  • Limitation on Deduction for State and Local Taxes.

  • Treatment of Business Income

If you are looking for assistance with your cross-border tax filing or compliance, please connect with us. At Kaman Kwok Inc., we are committed to serving our clients with clarity and purpose, knowing the value of who they are, and what they do. We support every client, allowing them to feel confident when facing challenges that confront people who conduct business on both sides of the border.

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