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Frequently Asked Tax Questions And Answers
Keyword: Tax Treaty 6.2 Social Security Income: Canadian & Foreign Treaties
In addition to U.S. Social Security benefits, I receive monthly
benefits from the Canada Pension Plan. I am a resident alien. Are my Canada
Pension Plan benefits taxable? How do I report them?
By provision of the income tax treaty between the U.S. and Canada, benefits
paid under the Canada Pension Plan (CPP), Quebec Pension Plan (QPP), and Old
Age Security (OAS) program to a U.S. resident are taxable, if at all, only
in the United States. These Canadian benefits are treated as U.S. social security
benefits for U.S. tax purposes. Thus, under section 86 of the Internal Revenue
Code, the portion of the benefits that is taxable will depend on your total
income. If your total income is above certain limits, a maximum of 85% of
your benefits will be subject to U.S. tax.
Canadian benefits that are treated as U.S. social security benefits are
reported on line 20a and 20b of Form 1040 or line 14a and 14b of Form 1040A.
References:
- Publication 597, Information on the United States-Canada
Income Tax Treaty
- Publication 915, Social Security and Equivalent Railroad
Retirement Benefits
- Tax Topic 423, Social Security and Equivalent Railroad
Retirement Benefits
For an American citizen residing in Canada using Form 1040A, should
the taxable amount of U. S. social security benefits shown on line 14b be
$0.00 due to the Canada-U.S. tax treaty?
Under the 1997 protocol to the Canada - U.S. tax treaty, the Canadian and
US governments agreed to return to a residence-based system under which social
security benefits are taxable exclusively in the country where the recipient
resides. As a result, the entry for line 14b would be $0.00.
References:
- Publication 597, Information on the United States-Canada
Income Tax Treaty
- Publication 915, Social Security and Equivalent Railroad
Retirement Benefits
- Tax Topic 423, Social security and equivalent railroad
retirement benefits
In addition to U.S. Social Security, I also receive British Social
Security. How should I report the British Social Security income?
Under the U.S.-United Kingdom income tax treaty that entered into force
during 2003, social security income is taxable only by the country of residence.
If you are a resident of the U.S. for tax purposes, the income would be reported
and taxed in the U.S. You would not treat the income as U.S. social security
benefits. The entire amount would be taxable as pension and annuity income
on your U.S. tax return. Your "investment in the contract" for purposes of
determining the portion of each payment that is taxable would be $0. Under
the prior treaty with the UK, social security benefits were treated the same
way.
References:
Are Social Security benefits received from Austria or Germany treated
like U.S. Social Security benefits? If not, how are they reported?
Austrian social security benefits paid to a U.S. resident or a citizen
of the US are taxable only by Austria and not by the United States. These
benefits should not be reported . German social security benefits paid to
a U.S. resident are taxable, if at all, only by the United States. These German
benefits are treated like U.S. social security benefits. Thus, under section
86 of the Internal Revenue Code, the portion of the benefits that is taxable
will depend on your income level. If your total income is above certain limits,
a maximum of 85% of your benefits will be subject to U.S. tax.
References:
- Publication 915, Social Security and Equivalent Railroad
Retirement Benefits
13.1 Aliens and U.S. Citizens Living Abroad: Canadian & U.S. Tax Issues
I am a Canadian citizen living and working in the U.S. for a U.S. employer
on a visa. Do I need to file both a U.S. tax return and a Canadian tax return?
You must comply with both U.S. and Canadian filing requirements. In the United
States, you generally are required to file a return if you have income from the performance
of personal services within the United States. However, under certain circumstances,
that income may be exempt from payment of U.S. tax pursuant to the U.S.-Canada income
tax treaty. You need to determine what type of visa you have, and how that impacts
your residency status in the United States. If, based on the tax code and your visa
status you are treated as a U.S. resident, then your entitlement to treaty benefits
will be impacted.
References:
I am a Canadian citizen who worked in the U.S. for 4 months. Do I have to
file a U.S. income tax return as well as my income tax return in Canada?
In the United States, you generally are required to file a return if you have income
from the performance of personal services within the US. The type of return to file
would depend upon whether you are a resident of the U.S. for purposes of U.S. tax
law. There are several tests to determine residency, including the substantial presence
test, which is based on how many days you are present in the U.S. over a period of
three years. Refer to Tax Topic 851 for information about which return to file.
If you are simultaneously a U.S. resident under U.S. law and a Canadian resident under
Canadian law, you should consult the U.S.-Canada income tax treaty for rules that
would treat you as a resident of only one country. It is also possible that you may
have to file a dual-status return in the U.S. if you qualify as a U.S. resident for
only part of the year. Refer to Tax Topic 852 for dual-status information.
References:
I am a U.S. citizen who lived in Canada and invested in Registered Retirement
Savings Plans (RRSPs) which are similar to IRAs. Under the Canada - U.S. Tax Treaty,
I am not sure how to treat the income on these investments. Is the income tax deferred
or must it be claimed as earned?
Although Canadian registered retirement savings plans are similar to individual
retirement accounts (IRAs), they do not meet the requirements for qualification as
IRAs under section 408(a) of the Internal Revenue Code. As a result, the earnings
of such a plan are includable currently in the gross income of the beneficiary of
the plan for United States income tax purposes. Whether or not the earnings are distributed.
However, a beneficiary of certain Canadian retirement plans may elect for a tax year
(the current year) to defer United States income tax on certain current-year earnings
of the plan that are not distributed to the beneficiary. An election to defer is made
by the beneficiary attaching to the beneficiary's United States federal income tax
return, a statement that contains for each plan the information specified in Revenue
Procedure 2002-23 , 2002-15 I.R.B. 744, or in any future Revenue Procedure that
supersedes Rev. Proc. 2002-23. Additional filing requirements are detailed in Notice
2003-25, 2003-18 I.R.B. 855 and Notice 2003-57, 2003-34 I.R.B. 397.
You can also download the most recent Internal Revenue Bulletins by visiting our Tax Info For Business section.
References:
- Publication 597, Information on the United States - Canada
Income Tax Treaty
- Revenue Procedure
2002-23, 2002-15 I.R.B. 744 (April 15, 2002), Notice 2003-25, 2003-18
I.R.B. 855 (May 5, 2003), Notice 2003-57, 2003-34 I.R.B 397
13.4 Aliens and U.S. Citizens Living Abroad: Nonresident Alien - General
I am a nonresident alien and invested money in U. S. stock market through
a U.S. brokerage company. Are the dividends and the capital gains taxable? If yes,
how are they taxed?
Generally, capital gains received by a nonresident alien not present in the United
States for 183 days or more are not taxable in the United States. Certain gains, however,
are subject to the 30% withholding rate or if applicable, a reduced tax treaty rate
on the gross amount of the following items:
1. Gains on disposal of timber, coal, or domestic iron ore with a retained economic
interest, unless an election is made to treat those gains as income effectively connected
with a U.S. trade or business,
2. Gains on contingent payments received from the sale or exchange after October
4, 1966, of patents, copyrights, secret processes and formulas, goodwill, trade marks,
trade brands, franchises, and other sale property,
3. Gains on certain transfers of all substantial rights to, or an undivided interest
in, patents if the transfers were made before October 5, 1966, and
4. Certain gains from the sale or exchange of original issue discount obligations
issued after March 31, 1972.
Dividends are withheld upon at the 30% or lower tax treaty rate. If your withholding
is not at the correct rate, a nonresident alien should file Form 1040NR (PDF), U.S. Nonresident Alien Income Tax Return , to claim a refund
of excess withheld taxes.
References:
13.5 Aliens and U.S. Citizens Living Abroad: Nonresident Alien - Tax Withholding
I entered the U.S. in August and I have a J-2 visa with an Employment Authorization
(work permit). Can I be considered as a U.S. resident for tax purposes under the substantial
presence test? Since my visa does not allow me to stay in this country am I subjected
to social security tax and Medicare tax?
You will be considered a U.S. resident for tax purposes if you meet the substantial
presence test for the calendar year. As an exempt individual, a J-2 visa holder will
not initially meet this test.
For purposes of the substantial presence test, certain days of physical presence
do not count, such as the days during which you were an exempt individual . Please
refer to Publication 519, U.S. Tax Guide for Aliens , for a detailed
explanation of this issue.
In general, U.S. social security and Medicare taxes apply to payments of wages
for services performed as an employee in the United States, regardless of the citizenship
or residence of either the employee or the employer. In limited situations, these
taxes apply to wages for services performed outside the United States. This exception
does not apply to a derivative visa holder.
References:
Under my visa as a temporary nonresident alien, I'm not subject to social
security and Medicare withholding. My employer withheld the taxes from my pay. What
should I do to get a refund of my social security and Medicare?
If social security tax and Medicare were withheld in error from pay received which
was not subject to the taxes, you must first contact the employer who withheld the
taxes for reimbursement. If you are unable to get a refund from the employer, file
a claim for refund with the Internal Revenue Service on Form 843 (PDF), Claim for Refund and Request for Abatement.
You must attach the following to your claim:
a copy of your Form W-2 (PDF) , Wage and Tax Statement,
to prove the amount of tax withheld;
Form I-797, INS Approval Notice, is needed if you have changed your status
from F-1 or J-1 to another status prior to filing the claim;
if your visa status changed during the tax year you should attach copies of the
pay stubs that cover the period of exemption from social security taxes;
a copy of INS Form I-94, Arrival/Departure Record, if you are still in the United
States;
a copy of your valid entry visa;
Form 8316, Information Regarding Request for Refund of Social Security Tax ,
or a signed statement stating that you have requested a refund from the employer and
have not been able to obtain one; and
a copy of Form 1040NR (PDF) , US Nonresident Alien
Income Tax Return (or Form 1040NR-EZ (PDF)), for tax
the year in question. Processing of your claim may be delayed if you submit it less
than six weeks after you filed Form 1040NR or 1040NR-EZ.
In addition to the documentation listed above foreign student visa holders should
also attach the following:
a copy of Form I-20, Certificate of Eligibility, endorsed by your student advisor
and stamped by the Bureau of Citizenship and Immigration Services; and
a copy of the Employment Authorization Document of your Optional Practical Training
(e.g., Form I-766, I-538 or 688B).
if you are an exchange visitor, attach a copy of Form IAP-66 or DS-2019 to your
claim.
File the claim, with attachments, with the IRS where the employer's returns were
filed. If you do not know where the employer's returns were filed, send your claim
to the Internal Revenue Service Center, Philadelphia, PA 19255.
For more information, refer to Publication 519, U.S. Tax Guide for Aliens .
References:
I am a U.K. resident and I need to recover withholding tax on a U.S. capital
gain. Do I need an ITIN?
To claim a refund of U.S. tax withheld you need to file Form 1040NR (PDF) , U.S. Nonresident Alien Income Tax Return . Therefore, you
need to secure an Individual Taxpayer Identification Number, or ITIN. To secure an
ITIN, you must file Form W-7 (PDF), Application for
IRS Individual Taxpayer Identification Number . For detailed information on applying
for an ITIN, go to Tax Topic 857 , Individual Taxpayer Identification Number
- W-7
References:
- Publication 515, Withholding of Tax on Nonresident Aliens and
Foreign Corporations
- Publication 519, U.S. Tax Guide for Aliens
- Publication 1915 (PDF), Understanding Your IRS Individual
Taxpayer Identification Number
- Form W-7 (PDF), Application for IRS Individual
Taxpayer Identification Number
- Tax Topic 857, Individual Taxpayer Identification Number -
Form W-7
- Form 1040NR (PDF) , U.S, Nonresident
Alien Income Tax Return
- Tax Topic 857 , Individual Taxpayer Identification Number
- Form W-7
I am a foreign citizen and resident from the European Union. I plan to buy
U.S. stocks, but what tax will I have to pay if I have earnings on stocks?
U.S. source dividend income is subject to 30% tax rate when paid to nonresident
aliens. A lower rate may apply to residents of a member country with which the United
States has an income tax treaty. The U.S. does not currently recognize the E.U. as
a taxing authority.
References:
I am a nonresident alien. Our broker withholds 30% tax on dividends. Can
I get this tax back since I already owe tax in my residence country on overseas income?
Generally, this type of income paid to nonresident aliens is taxable at the 30%
or lower treaty rate. If your country has a tax treaty with the U.S., you may have
a reduced rate of tax. If that is the case, you should file Form 1040NR (PDF), U.S. Nonresident Alien Income Tax Return, to claim a refund
of federal income taxes withheld. To avoid future excess withholding, provide your
broker with a completed Form W-8BEN (PDF) , Certificate
of Foreign Status of Beneficial Owner for U.S. Tax Withholding. You may be entitled
to a credit against the tax you owe to your residence country for the U.S. tax that
is withhold from your dividends.
References:
13.6 Aliens and U.S. Citizens Living Abroad: Nonresident Alien - Students
I am an F-1 student status who was employed during my school studies and
directly afterwards I completed practical training. Do I have to pay FICA taxes? Which
taxes should be taken out of my pay?
Generally, services performed by you as a nonresident alien temporarily in the
United States as a nonimmigrant under subparagraph (F), (J), (M), or (Q) of section
101(a)(15) of the Immigration and Nationality Act are not covered under the social
security and medicare programs if the services are performed to carry out the purpose
for which you were admitted to the United States. This means that there should be
no withholding of social security or Medicare taxes from the pay you receive for these
services. These types of services are very limited, and generally include only on-campus
work, practical training, and economic hardship employment. However, you are covered
under the social security and medicare programs for these services if you are considered
a resident alien, even though your nonimmigrant classification ("F," "J," "M," or
"Q") remains the same. Social security and Medicare taxes will be withheld from your
pay.
Additionally, any student who is enrolled and regularly attending classes at a
school, college, or university may be exempt from social security and Medicare taxes
on pay for services performed for such school, college, or university.
References:
Are nonresident alien students, with F-1 or J-1 visas and employed by a
U.S. company during the summer, required to have federal income taxes withheld from
their paychecks?
The following discussion generally applies only to nonresident aliens. Wages and
other compensation paid to a nonresident alien for services performed as an employee
are usually subject to graduated withholding at the same rates as resident aliens
and U.S. citizens. Therefore, your compensation, unless it is specifically excluded
from the term "wages" by law, or is exempt from tax by treaty, is subject to graduated
withholding. Nonresident aliens must follow modified instructions when completing
Form W-4. Please refer to Publication 519, U.S. Tax Guide for Aliens,
for directions on completing Form W-4 (PDF), Employee's
Withholding Allowance Certificate .
References:
I am a student from the People's Republic of China currently studying in
the United States. How does the income tax treaty between the U.S. and China apply,
especially for students with scholarships and fellowships?
If you are in the United States solely for the purpose of your education, training,
or obtaining special technical experience, you may be able to exclude from your income
grants or awards that you receive from a government, scientific, educational, or other
tax-exempt organization. You also may be able to exclude payments that you receive
from abroad for the purpose of your maintenance, education, study, research, or training
and up to $5,000 of income that you receive from personal services performed in the
United States. Please refer to Publication 901 , U.S. Tax Treaties,
for further details.
References:
13.8 Aliens and U.S. Citizens Living Abroad: Other
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