Q&A: My income is suddenly above the exclusion threshold. What now?
Q: I hold dual citizenship in the USA and Canada. I immigrated to Canada from the US and have been residing in Canada permanently since that time. My income is derived solely from my employment salary. At present, my wife (Canadian citizen) and I jointly own a house which we live in. We are still paying a mortgage on this property. Aside from our pension funds through our employers, we do not hold any other investments.
Up until the end of financial year 2008, my Canadian earnings have been below the exclusion threshold (when converted to US dollars). However, in 2009, my earnings exceeded that exclusion threshold for the first time. My understanding is that, provided my home country income tax is higher than it would have been in the US, I should be allowed to claim credits which eliminate my taxable income for US reporting purposes. Could you please help me understand the details and requirements better?
A: Unfortunately, regardless of whether your income was below the Foreign Earned Income Exclusion amount, as a US citizen you have an annual obligation to file a US tax return.
Second, individual taxpayers must be on a calendar year tax year. Other types of entities can have fiscal years that do not end on December 31st, but all individuals do. What we do for clients who are in countries that are not calendar year is to compile an annual income and taxes paid by month. This way we can have the correct calendar year amounts. We also convert the currency based on an annual monthly average for the particular year.
Third, unless your wife has an ITIN (similar to a Social Security Number– for more information please see this IRS page) and intends to report her worldwide income you will be required to file Married Filing Separate rather than Married Filing Joint.
Finally, we are not experts in any tax systems except the US. We always encourage our clients to retain our counter-parts in the host country. Please see the Tax Links section off our Self-Help Links page on our main site for useful information on specific countries.