Canada: Personal U.S. Tax Changes

On November 2, 2017, the Ways and Means Committee of the U.S. House of Representatives released a tax reform bill entitled The Tax Cuts and Jobs Act. Since then, the House and Senate Tax Cuts and Jobs Act Conference Committee released its final version of the legislation that is expected to become law in the coming days. It is the most comprehensive U.S. tax reform in more than thirty years.

At just under 500 pages, the bill is quite lengthy. This article is not intended to cover all proposed changes, but we have created a "top 10 list" that addresses the more notable personal tax changes that might impact U.S. citizens (or green card holders) living in Canada. The changes will not take effect until after the 2017 tax year and many are expiring after 2025.

  1. New standard deduction – U.S. taxpayers have a choice between a standard deduction and itemized deductions (mortgage interest, property taxes, medical expenses, etc.), whichever is more beneficial. The new standard deduction would be increased from $12,700 to $24,000 for joint filers and from $6,350 to $12,000 for individual filers.
  2. Elimination of personal exemptions – Currently, most taxpayers are eligible for a $4,040 deduction for each personal exemption. The new provision will eliminate this deduction in favor of the increased standard deduction.
  3. Reduced mortgage interest deduction – Currently, taxpayers may deduct mortgage interest on acquisition debt of up to $1 million, related to any qualified residence. Now, the $1 million acquisition debt limit will be reduced to $750,000, and interest related to home equity indebtedness is no longer deductible.
  4. State, local, sales and property tax deductions – State and local income taxes, including property taxes, will be limited to a maximum deduction of $10,000 for joint filers, $5,000 for married filing separate filers.
  5. Alimony deduction – Currently, alimony payments are deductible for the payers and taxable to the recipients. The bill eliminates the deduction and taxation of alimony. This change will create an interesting situation for cross-border alimony payments, wherein the U.S. and Canadian rules no longer harmonize. It is possible that an alimony payment received by a Canadian resident from an American resident payer would be taxable to the Canadian but not deductible for the American.
  6. Medical expense deduction – The itemized deduction of medical expenses has been retained, and temporarily enhanced for the 2017 and 2018 tax years by reducing the threshold for the deduction to 7.5 per cent of adjusted gross income from 10 per cent.
  7. Moving expense deduction – The deduction for moving expenses will be eliminated for tax years 2018 through 2025. In addition, any moving expenses reimbursed by the taxpayer's employer will be included in income.
  8. Deemed Repatriation Tax – U.S. citizens owning Canadian corporations may be subject to a one-time tax on accumulated profits within the Canadian corporation. A 16.4 per cent tax rate on retained earnings held in cash or near cash assets, and an 8.5 per cent rate on all other assets of retained earnings. Foreign tax credits may be utilized to help offset this tax. This item still requires clarification as many practitioners believe this is an unintended consequence of the new legislation.
  9. Estate tax – Currently, U.S. citizens and residents are subject upon death to an estate tax rate of up to 40 per cent on their net worth in excess of the exclusion amount of $5,490,000. The exemption is now increased to approximately $11 million ($10 million indexed for inflation) and applies to tax years 2018 through 2025.
  10. Alternative minimum tax – Currently, taxpayers compute their income for regular tax and alternative minimum tax (AMT). The bill has increased the AMT exemption amount and would only apply to a $500,000 income level for single filers ($1 million for joint filers).

The changes will certainly have an impact on U.S. residents, but for a typical U.S. citizen living in Canada the above changes likely will not have a significant impact on the outcome of their overall U.S. tax liability, as the Canadian tax rates would remain higher than the U.S. rates. In other words, any decrease in U.S. tax rates would simply shift the amount of taxes payable to Canada versus the U.S., but not the overall taxes. Having said that, point #8 above may significantly impact U.S. citizens owning Canadian corporations. Professional tax advice should always be sought before making any tax-related decisions.

The Tax Foundation, a leading group of independent tax policy analysts, suggests that the plan would result in 0.9 per cent higher after-tax income for all U.S. taxpayers, and a 3.3 per cent increase in after-tax income for the top one per cent by 2027.

Finally, employers who send their employees into the United States and cover the tax cost of their assignments, typically through tax equalization agreements, may see an increase in tax costs. Again, the loss of state, local and property tax deductions, as well as the repealed moving expense deduction, may have a negative impact on tax costs related to employee relocations and foreign assignments.

The bill reduced the U.S. corporate tax rate from 35 per cent to 21 per cent, along with an extensive list of other tax benefits and tax increases. We will have further commentary on these changes as the tax reform bill nears enactment.

This bill is poised to have a significant impact across the spectrum of U.S. taxpayers. If you are a U.S. citizen or green card holder living in Canada, contact your Collins Barrow advisor for guidance and more information on how the bill could affect you. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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