US TAX – PART 2

Topic covered: Filing status Exemptions Standard deduction Itemized deduction

Filing Status Single Head of Household Married filing separately Married filing jointly Qualifying widow with dependent child

Single Single if considered unmarried on Dec 31 and doesn’t qualify for any other filing status

Head of household Usually results in lower tax rate Similar to Canadian eligible dependent credit Requirement (all must be met): Must be unmarried or considered unmarried on last day of tax year Pay more than half of cost of keeping a home Qualifying person MUST live with the taxpayer for more than half the year (unless parents) If Parents, must pay more than half of cost of maintaining their home (eg. Retirement home) Qualifying relative must be member of taxpayer’s family (more on this later)

Married filing Jointly If married, this filing status results in optimal tax situation typically for couples Both spouses are jointly responsible for the tax liability Must combine all income/expenses of both individuals Both spouses must be resident for full year to be eligible to file jointly If one spouse is dual status or nonresident, can elect to treat him/her as full year resident

Married filing Separately Beneficial if each spouse wants to only be liable for their own taxes (rich people usually) Following rules apply: Cannot take credit for child and dependent care expenses usually Cannot take education credits Child tax credit reduced Deduction limit for capital loss is $1,500 ($3k for MFJ) If one spouse itemizes, other spouse must also itemize

Qualifying Widow with Child (QW) If one spouse dies during the year, surviving spouse can still file MFJ for that year Above surviving spouse can file as QW for two more years following year of death Entitles taxpayer to use MFJ standard deduction and jointly return tax rates Must meet all criteria: Must be entitled to file MFJ in year of death Must not remarry before end of tax year Must have child/step child for whom he can claim exemption Child lived in the person’s home all year Taxpayer and deceased spouse paid more than half the cost of maintaining a home

Married filing jointly or qualifying widow/widower Tax rate Single filers Married filing jointly or qualifying widow/widower Married filing separately Head of household Tax rate: 10% Up to $9,275 Up to $18,550  Up to $13,250 Tax rate: 15% $9,276 to $37,650 $18,551 to $75,300 $13,251 to $50,400 Tax rate: 25% $37,651 to $91,150 $75,301 to $151,900 $37,651 to $75,950 $50,401 to $130,150 Tax rate: 28% $91,151 to $190,150 $151,901 to $231,450 $75,951 to $115,725 $130,151 to $210,800 Tax rate: 33% $190,151 to $413,350 $231,451 to $413,350 $115,726 to $206,675 $210,801 to $413,350 Tax rate: 35% $413,351 to $415,050 $413,351 to $466,950 $206,676 to $233,475 $413,351 to $441,000 Tax rate: 39.6% $415,051 or more $466,951 or more $233,476 or more $441,001 or more

Personal and Dependents Exemption There are two types of exemptions that are worth $4,000 each: Personal exemptions Exemptions for dependents Phases out if taxpayer exceed certain income threshold MUST HAVE US TAX ID (either Social security number or ITIN)

Personal Exemptions Single taxpayer receive one personal exemption unless he can be claimed as someone else’s dependent Joint return – additional exemption available for spouse MFS – Can claim for spouse if she has no gross income, doesn’t file return, and is not dependent of another taxpayer Death of a spouse – Can usually claim exemption for deceased spouse

Exemptions for dependents To claim exemption for dependent, must meet all three criteria: Dependent test – Taxpayer cannot qualify as a dependent of another person Joint Return test – Taxpayer cannot claim a married person who files a joint return as a dependent, unless the married person files the return only as a claim for refund Basically children who are married Citizenship or Resident Test – Dependent must be US resident or a resident of Canada/Mexico for some part of the year

Exemptions for dependents The dependent must also be either: Qualifying child; OR Qualifying relative

Qualifying child Requirements: Relationship test: Child must be child, sibling, or descendent of them Age test: Child must be younger than the taxpayer and either 1) younger than 19 on Dec 31, 2) Younger than 24 on Dec 31 if full time student, OR 3) any age if permanently disabled Residency test: Child must live with taxpayer more than half the year (temporary absence doesn’t count) Support test: Child cannot provide for more than half of his own support

Qualifying relative Can be of any age. Doesn’t have to be related Requirements: Support test: taxpayer generally must provide more than half of a person’s total support during the year Gross income test: dependent’s gross income must be less than $4,000 during the year Member of household or relationship test: Dependent must be either: Live with the taxpayer all year as a member of household; OR Must be related in one of the following ways – see next slide

Must be related in one of the following ways: Child or a descendant of any of them Sibling Parents or other direct ancestors Step parents Son or daughter of taxpayer’s sibling Sibling of taxpayer’s parents Son/daughter/Father/Mother/Brother/Sister in law

Standard Deduction Based on filing status. Free deduction Can’t use standard deduction if: Filing MFS and other spouse use itemized deduction Dual status alien during the year Filing status Standard deduction Single $6,300 Married filing separately Married filing jointly $12,600 Head of Household $9,250 Qualifying Widow

Itemized deduction Instead of claiming standard deduction, taxpayer can choose to claim itemized deduction in the year if it will lead to higher deduction For nonresident alien, itemized deduction are severely limited to: State tax, US donation, etc.

Itemized deduction Medical and dental expenses: Taxes Paid: Must exceed 10% of AGI Taxes Paid: State, foreign, property Not deductible: FICA, sales tax, estate/gift tax Home Mortgage interest To buy or improvement principal residence – limited to mortgage of $1M HELOC – limited to $100k Mortgage insurance premium

Itemized deduction Investment Interest Gifts to Charity Limited to Investment income Gifts to Charity Limited to 50%, 30%, 20% of AGI depending on type of gift Qualified charity in Canada is deductible in US against 50% of CDN source AGI All donations must have proof of payments either via a receipt or cancelled cheque $250 or more must have written receipt

Itemized deduction Casualty and Theft losses In excess of insurance reimbursement and only if exceeds 10% of AGI Misc deductions mostly limited to amount exceeding 2% of AGI: Tax return prep fee Union dues Safe deposit box Unreimbursed employee expenses Investment expense