Do I Need to File a Return with the IRS Every Year if My Business is Located and I Reside in Canada?
For many US citizens, the matter of tax filing can become complex especially when they live or work outside the United States. A common concern for Canadians who maintain US citizenship is whether they need to file an income tax return with the IRS during their time living and working in Canada.
Understanding the Requirement
As a US citizen, regardless of where you live or work, you are legally obligated to file a US income tax return every year you meet the reporting requirement. This includes those who reside in Canada and who have US-based businesses or incomes. The purpose of this requirement is to ensure compliance with US tax laws and to claim any potential tax benefits.
The Foreign Earned Income Exclusion
One significant benefit for US citizens living abroad is the Foreign Earned Income Exclusion (FEIE), which allows individuals to exclude certain foreign-sourced earned income from US taxation. For the 2016 tax year, the maximum exclusion amount was USD 101,300, though this amount is indexed for inflation in subsequent years. This exclusion can substantially reduce the amount of US income tax you owe, making your tax filing experience more manageable.
The Foreign Tax Credit
Another valuable tool is the Foreign Tax Credit (FTC). This credit allows you to offset US tax liabilities with taxes paid to foreign governments. While the FEIE and FTC can significantly reduce your US tax liability, it is crucial to remain compliant and file your return on time to fully enjoy these benefits.
Special Circumstances for Canadians
While the FEIE and FTC provide significant benefits, Canadians who are US citizens may still need to file a tax return with the IRS, even if they do not owe any additional taxes. This is because the mere act of filing can ensure that you are eligible for various tax credits and deductions. For instance, if you earn more than the threshold amount (which was over USD 100,000 as of 2015 and is adjusted annually for inflation), you may be eligible for these exclusions, but you still need to file.
Seeking Professional Advice
Given the complexity of US tax laws, it is highly recommended that you liaise with a qualified tax professional. Individuals with a US attorney, CPA, or Enrolled Agent should ideally be sought after. You can often find such professionals through referrals from trusted colleagues or industry contacts. They can provide valuable guidance and ensure that you file correctly and efficiently.
Conclusion
As a US citizen residing in Canada, you are required to file an income tax return with the IRS. While the exclusion for foreign earned income and foreign taxes can significantly reduce or eliminate additional US tax obligations, compliance remains essential. Working with a qualified tax professional can help navigate the complexities of the process, ensuring you remain in compliance and maximize your tax benefits.