paying US income taxes?

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Q. paying US income taxes? My friend's daughter was born in the US and is now living with her family in Canada. I believe she's a Canadian citizen and will likely start working here soon (she's in her teens). Is she required to pay income taxes to the IRS on her income earned in Canada? What about Canadian income taxes?

A. Canada imposes income taxes on residents, so if she is working in Canada, thereby earning income, she will have to pay Canadian income taxes on her international income. The US government is somewhat more aggressive about things; they consider that they can assess taxes on US citizens' income whereever they may be. That initially sounds potentially rather bad; it usually isn't. Tax treaties allow taxes paid to one country to be considered a credit for the purposes of the other country. Thus, if she pays $5,000 of taxes to Canada, the IRS would deduct that from the potential US tax bill. The net effect of such tax treaties is that the individual winds up paying the higher of the two countrys' tax rates, which has long been the Canadian rate. In addition, there has generally been some sort of exemption, on the US side; nonresidents ("expatriates") are exempt of US taxes on something like the first $75K of foreign-sourced income. If she's in a "middle class" sort of situation, she's unlikely to have extra taxes to pay to the IRS; complications warranting pricey tax counsel could certainly arise if she's a "trust fund" sort of kid. -Short answer: She'll have to file both Canadian and US tax returns on her total income -- even if it was all earned in Canada. However, her US tax return almost certainly will not actually require her to pay any US tax -- so she'll just be paying Canadian taxes and sending in some paperwork to the US. Longer answer: As far as Canada is concerned, Brian's friend's daughter is a resident of Canada, and she's therefore required to pay Canadian federal and provincial income taxes on her total income from all sources worldwide. Since she was born in the US (and I'll assume here that her parents were in the US for some reason other than a foreign diplomatic assignment), she is a US citizen as far as the US is concerned. This doesn't conflict at all with her Canadian citizenship -- each country is perfectly happy to consider her to be one of its own citizens and completely ignore the other country's claim on her -- but that's a separate issue. The US has a requirement (almost unique in today's world) that says that all US citizens are liable for US federal income tax on their total income from all sources worldwide. It doesn't matter if the person didn't spend even one single day in the US during the entire year -- or if their income came entirely from a business or other source in a foreign country -- or even if the person is a "dual" citizen both of the US and of the country where they live and work. The mere fact that someone is a =citizen= of the US is all that's required to make them subject to US income tax law, as far as the US is concerned. Fortunately, though, there are some important provisions in the US tax law that will normally protect an American living and working full-time outside the US from actually having to =pay= any US tax. In particular, the "Foreign Earned Income Exclusion" -- IRS Form 2555, or 2555-EZ (pronounced "easy" :-}) -- allows an annual amount up to about US$80,000 (or the equiv- alent in foreign funds) to be subtracted from one's wages or salary (i.e., "earned" income, as opposed to things like interest on savings or returns on investments) before actually computing the income tax. This one provision, all by itself, will probably be more than enough to reduce Brian's friend's daughter's US-taxable income (and thus her US income tax) to zero. If, for some reason, the Foreign Earned Income Exclusion isn't sufficient to erase any US tax bill, the "Foreign Tax Credit" (IRS Form 1116) can be used -- either instead of, or on top of, the Foreign Earned Income Exclusion. The way the Foreign Tax Credit works (very roughly speaking -- the actual credit is quite complicated and would probably require assistance from a professional tax preparer) is that the amount of non-US =tax= due on non-US income can be subtracted from the US tax bill. Since combined federal + provincial income tax in Canada is generally higher than US federal tax on the same amount of income, this credit would normally be enough to erase US tax liability. But even if the end result is that no US federal income tax is due, US law still requires a tax return (IRS Form 1040 or one of its variations) to be filed every year anyway if one's total worldwide income for the year (before taking the Foreign Earned Income Exclusion or any other deductions) is sufficiently high. This is all complicated enough that Brian's friend's daughter may very possibly want to look for a professional tax preparer or financial adviser who is familiar with US as well as Canadian tax laws. If she really wants to do it all herself, though, the forms, instructions, and publications can be found online at: http://www.irs.gov Also, in order to fulfil her obligation (under US law) to file US tax returns, Brian's friend's daughter is going to need to get a US Social Security Number (similar to a Social Insurance Number in Canada). Information on how a US citizen living outside the US can get a Social Security Number can be found online at: http://www.socialsecurity.gov/online/ss-5fs.html Note that the situation is =not= the same if a dual US/Canadian citizen is living/working full-time in the US. Such a person must file (and pay!) US income tax, of course -- but Canada doesn't assert any claim to tax non-Canadian-source income of nonresident Canadians solely because of their citizenship. I'm a dual US/Canadian citizen living and working in the US, for instance, but because I have no Canadian residential ties of any kind, I don't have to pay any Canadian income tax, and I don't even need to file a T1.

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