TN + W4 + Tax questions

[nictven]

Hi, I got a job offer in the States. I quitted my job in Canada on Sept 23, and I got my TN on Sept28, 2008. It's granted 355 days (as usual). Now, my new employer in the States requires me to fill out a W-4 form for taxation purpose. Let me explain my current status:

- Married, both canadian citizens, and wife decides to stay and work in Canada for at least half a year before moving down (as T-D)

- We own an apartment (on mortgage) in Canada and NOT selling it until my wife decides to move down

- We both have our other family members (mom/dad/siblings) in Canada

- Since I have mortgage in Canada, so I remain resident-status in Canada

- I am renting a furnished place in the States at the moment, and opened a bank account for payroll. I do NOT own any property in the States (no house, no car, no furniture)

I have read through P151, and IRS related 8840, they made my head spin.

Questions:

= Since I started Sept 28, so how many days am I actually counted towards the 183 days limit for substantial presence test as resident alien in the tax year 2008?

= If I am a NRA, do I need to fill out a 1040NR now even it's already past June 15, 2008?

= If I am a resident alien, I believe I have closer connection to Canada in the tax year 2008, do I need to fill out a 8840 now even it's already past June 15, 2008?

= Any specific details or forms I have to take notice of, OR notify my employer, so that it minimizes my tax withholding in the States, and avoid getting double taxed?

Thanks in advance!

Nict

[CalGreenCard]

Questions:

= Since I started Sept 28, so how many days am I actually counted towards the 183 days limit for substantial presence test as resident alien in the tax year 2008?

= If I am a NRA, do I need to fill out a 1040NR now even it's already past June 15, 2008?

= If I am a resident alien, I believe I have closer connection to Canada in the tax year 2008, do I need to fill out a 8840 now even it's already past June 15, 2008?

= Any specific details or forms I have to take notice of, OR notify my employer, so that it minimizes my tax withholding in the States, and avoid getting double taxed?

Thanks in advance!

Nict

You would file Form 1040NR/Form 8840 no later than April 15, 2009 for the 2008 tax year. You would almost certainly qualify to file Form 1040NR based on the facts given--you neither meet the substantial presence test nor do you have a closer tax connection to the US. However, the deadline for 1040NR is April 15 (not June 15) since your US income includes wages subject to withholding.

[CalGreenCard]

Since I started Sept 28, so how many days am I actually counted towards the 183 days limit for substantial presence test as resident alien in the tax year 2008?

The formula is:

(num. of days physically present in 2008)+(num. of days physically present in '07 / 3)+(num. of days physically present in '06 / 6)

There are 95 days from Sept 28-Dec 31 so that period alone does not come close to meeting the substantial presence test.

[Steven]

The substantial presence test is not something that you ever really need to worry about, it's a test of last resort, what's more important is where your principal residence is, where you hold a DL etc. That test only comes into it if it's still unclear. The question is where you substantially have ties.

You clearly are a non-resident alien if your wife still lives in Canada and you still have your principal residence there.

What you do in this situation is file a T1 as normal next year, and you claim a foreign tax credit (which is explained in the T1 instructions) using the information your employer will give you on your W-2 (which is the equivalent of a T4).

In the US you file a 1040NR together with an 8840 (and your W-2).

On your W-4 you must state that you are a non-resident alien and your employer must do NRA withholding, which is done at a slightly higher rate than for residents.

You do effectively pay more tax filing as an NRA, because you end up paying Canadian income tax + US social security tax after you claim the foreign tax credit in Canada, and US social security taxes are higher than CPP (unless you're in a low income bracket).

However in your case there clearly is no other way to do it as you clearly have residential ties to Canada. You can't file as a US resident until you sever your ties to Canada.

More info in IRS publication 519 and pages 22-26 of IRS publication 515.

If you want to move your tax home to the US it's better if you can do it on January 1st because it will save you having to file dual-status in 2010. It is really not a good idea to move your tax home to the US if you only plan on being in the US temporarily (i.e. a year or two). The paperwork to move it there and then move it back is pretty intimidating.

If you read IRS publication 519 it will give you an idea, but effectively, if you move your tax home to the US in the middle of next year, you will have to file in 2010:

A 1040 return (dual-status);
A 1040NR return (dual-status);
A T1 return (and maybe a dual-status non-resident T1);
Probably an 8891 to declare RRSPs if you have any;
A FinCEN form declaring any foreign assets over $10,000;
And possibly other bits of paperwork, 8840, 8833, 1116, etc.

To do it in reverse is even more complicated, you have to file those three tax returns again plus a 1040-C and a variety of other bits of paper.

Like I said, if you decide to do it, you can save yourself a lot of grief if you can move your tax home on January 1st because then you only have to file one tax return the following year rather than three.

If you screw it up when you leave and you move to Canada or the UK there is a good chance the IRS will come after you, it happened to one of my relatives and the IRS has offices in London and Ottawa.

From a paperwork standpoint it is easier to continue to file as a non-resident if you ever plan on moving back to Canada, but hardly anyone does who stays for any length of time as you end up paying more tax.

In addition the IRS doesn't like people filing as an NRA for more than five consecutive years if they have a US address on their 1040NR.

[nictven]

Thanks for the replies, CalGreenCard and Steven, especially Steven's detail one.

While I am still reading through 515/519.for my situation, my end result would be:

- since I am NRA, as declared on W-4 to my US employer, my tax withholding will be more than normal US citizen (=30%?)

- when I file my US tax return together with 1040NR and 8840 to prove I am a NRA, any chance of getting refund from the 30%(?) withholding amount?

Questions:

= What if I do not declare NRA on my W-4 to my US employer so that they won't withhold too much (how will it affect W-2?)

= and then, when I file my US tax return, could I still supply 1040NR and 8840 to 'explain' the situation?

Thanks,

Nict

[CalGreenCard]

Thanks for the replies, CalGreenCard and Steven, especially Steven's detail one.

While I am still reading through 515/519.for my situation, my end result would be:

- since I am NRA, as declared on W-4 to my US employer, my tax withholding will be more than normal US citizen (=30%?)

- when I file my US tax return together with 1040NR and 8840 to prove I am a NRA, any chance of getting refund from the 30%(?) withholding amount?

Questions:

= What if I do not declare NRA on my W-4 to my US employer so that they won't withhold too much (how will it affect W-2?)

= and then, when I file my US tax return, could I still supply 1040NR and 8840 to 'explain' the situation?

Thanks,

Nict

The tax withholding, on wages/salary, won't be at 30%--it will only be slightly higher than for US citizens as Steven says. As a nonresident alien you cannot claim the US standard deduction so the withholding is slightly higher. But the flat rate of 30% (actually I believe it is reduced to 15% for Cdns due to the tax treaty) only applies to income not "effectively connected with a US trade or business". Your wages/salary is "effectively connected with a US trade or business" so it is subject to tax at the usual rates, but without the standard deduction that US citizens get.

Your employer may or may not get the exact nuances of the withholding correct. Because you will be working in the US for such a small part of 2008, you will almost certainly be due a substantial refund from the IRS regardless of whether they get it exactly right, so I wouldn't worry about the withholding for 2008. For 2009, once you have worked through the process once, you should be able to estimate your tax due, and if the employer's withholding seems to be coming up a bit short, you can always send in estimated tax payments.

Yes, you should get a refund for 2008--the flat rate of 15%/30% won't apply to your situation.

I'm not sure how the employer is supposed to know that you are a NRA if you put a US address on the W-4 form. Being a NRA for tax purposes is different from sponsoring someone for TN status, and the W-4 form is not detailed enough for the employer to make the determination. So the employer may or may not get the withholding exactly right. If the employer under-withholds, you should be correcting it by making estimated payments (or paying the balance due on April 15 if it is small). If the employer over-withholds, you should get a refund.

[Steven]

- since I am NRA, as declared on W-4 to my US employer, my tax withholding will be more than normal US citizen (=30%?)

No, it's non-resident withholding. Have a read of pages 22-26 of publication 515, it explains how the employer has to do it and how to fill in the W-4. The key point is that many employers aren't familiar with doing NRA withholding, however most popular accounting packages have the facility to do it, so it shouldn't be a problem for them. At the end of the day it's their responsibility anyway, your only responsibility is to make them aware of your status on W-4.

- when I file my US tax return together with 1040NR and 8840 to prove I am a NRA, any chance of getting refund from the 30%(?) withholding amount?

As with all withholding taxes, if you overpay you get a refund.

= What if I do not declare NRA on my W-4 to my US employer so that they won't withhold too much (how will it affect W-2?)

If you do that you are misrepresenting yourself to your employer and you're supposed to file a 1040 instead of a 1040NR, which you cannot do in your situation as you are not a resident of the US. You would end up getting taxed twice so it's highly inadvisable. If at some future point you move your tax home to the US, you need to give them a new W-4 at that point.

= and then, when I file my US tax return, could I still supply 1040NR and 8840 to 'explain' the situation?

Then you're at the mercy of the IRS believing you, not advisable. Your real problem here is not the withholding, it's being considered a US resident taxpayer which is a much bigger problem you want to avoid. At least until your wife moves down and you sever all residential ties to Canada. (Which you should try and accomplish by January 1st for tax purposes if you want to file as a resident the next year).

Frankly on TN-1 I always tell people to file as non-resident indefinitely, because you're supposed to always have "non-immigrant intent" for TN-1, but nobody does who has TN-1 for years because you end up paying a load more tax. Given the current economy though I still think my advice is a good idea, in case you get the chop.

Bear in mind if you ever get refused entry or you lose your job, you automatically become a tax resident of Canada at that moment, which means a ton of paperwork if you've moved your tax home to the US. If you're already filing as a non-resident, you simply have to cease filing the US paperwork in future years which is much easier.

In fact, if your employer decides to keep you on in Canada as a self-employed individual (because they don't want to do the Canadian payroll withholding themselves - the usual situation) it also makes it easier because the US tax paperwork is largely consistent, but you file an 8833 instead of an 8840 with your 1040NR and declare your US-source income.

[CalGreenCard]

No, it's non-resident withholding. Have a read of pages 22-26 of publication 515, it explains how the employer has to do it and how to fill in the W-4. The key point is that many employers aren't familiar with doing NRA withholding, however most popular accounting packages have the facility to do it, so it shouldn't be a problem for them. At the end of the day it's their responsibility anyway, your only responsibility is to make them aware of your status on W-4.

You're right. He should be noting "Non-Resident Alien" on Line 6. However.

If you do that you are misrepresenting yourself to your employer and you're supposed to file a 1040 instead of a 1040NR, which you cannot do in your situation as you are not a resident of the US.

This part I disagree with. The form doesn't specifically ask about residency status. It would be better to fill in the "Non-Resident Alien" because it increases the probability of the employer getting the withholding right. But the form doesn't specifically ask so you aren't perjuring yourself by leaving this information out.

IMHO it depends on the employer. If you are dealing with a large employer who has hired lots of non-resident aliens in the past, it would be better to fill the information in. If you are dealing with a small employer who has never done this before and is a bit nervous about the whole TN process to begin with, it might be better to leave this out to avoid making them more nervous.

In either case you aren't perjuring yourself.

Then you're at the mercy of the IRS believing you, not advisable.

If the IRS doesn't believe you then they can audit you and demand documentation to support your claim to be a nonresident. They can take this step whether or not you have nonresident withholding. The only way the W-4 really comes into play at year's end is if you are intentionally under-withholding for the purpose of evading taxes. I recommend paying what you owe one way or another but I'd also recommend being a bit cautious about the whole "Non-Resident Alien" thing on the W-4 with certain kinds of employers.