U.S. taxes: What snowbirds need to know
While a strong loonie has many Canadians thinking about a winter escape, longer stays across the border can have significant financial implications.
Thinking about flying south over the next few weeks? Perhaps even staying for a few months or longer?
Well, now is the time to review your plans for that extended vacation, especially if you're thinking of becoming a regular snowbird and want to avoid getting caught up in U.S. tax laws — particularly the recent changes to U.S. estate tax rules that just kicked in last week.
The rules governing U.S. residency are complicated, so if your stay will be measured in months rather than weeks or if it involves buying property rather than a resort stay, be sure to talk to a lawyer familiar with cross-border tax planning.
As a rule of thumb, providing you spend no more than four months in the U.S. in any calendar year, U.S. taxes likely won't be an immediate concern. But there are exceptions that can trip up inexperienced snowbirds.
To see where the IRS draws the line, take all of the days you spent in the U.S. during the current year, add one-third of the days you were there in the previous year, plus one-sixth of the days spent in the U.S. during the year before that.
If that number equals 183 or more, you may have to pay some U.S. taxes.
One way around all this is to file IRS Form 8840 to apply for a "closer connection" exemption. This allows you to declare that you have a primary tax and residency connection to Canada, indicated by items such as a home, a job, bank accounts and memberships to social, religious or cultural associations here in Canada.
On top of this, to prove to overzealous border officials that you have the means to support yourself during your stay and are actually planning on returning to Canada, the Canadian Snowbird Association recommends carrying copies of the following documents:
- driver's license
- credit card statements
- tax return assessment notice
- bank and investment account statements
- house deed or lease agreement
- a return ticket, if travelling by air
- a travel insurance policy with a termination date
As a non-resident alien, you can still expect to be taxed on any income you earn in the U.S., just like a U.S. citizen. And that includes any gambling or lottery winnings.
If you're renting out your hideaway in the off-season for instance, you'll be expected to settle up with the IRS, including withholding taxes on your rental income, and, in certain circumstances, U.S. estate taxes.
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