1. US TAX – PART 2

2. Topic covered: Filing status Exemptions Standard deduction
Itemized deduction

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

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

5. 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)

6. 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

7. 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

8. 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

9. 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

10. 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)

11. 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

12. 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

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

14. 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

15. 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

16. 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

17. 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

18. 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.

19. 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

20. 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

21. 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