Canada-US tax tips - US Self-employment tax

[nightingalejules 678]

Hey, everybody! Just wanted to drop in and mention this tip. Here's our situation, in case it also applies to you.

My husband (US/Canadian Dual Citizen) has been living in Canada since he came here to go to University in 2005. We met in 2009 and married last year and now we want to move to the US so we've filed for a CR1 Visa (en route to NVC as I type) He's a musician/composer/music teacher and as such is self-employed.

He hadn't filed taxes in either country for a few years (Baaaad boy!) but since (a) You have to file a joint return in Canada and (b) we need to get up-to-date on US taxes to file AOS at NVC, we're catching up on all the taxes.

Soooo, Canadian taxes are sent in, waiting for response from CRA. Using that information, I started looking around for how to get him into compliance with the IRS.

First of all, there's what's called the Streamlined Process for Non-Resident US citizens, which lets him come back into compliance by filing the last 3 years of taxes. If he owes money, he owes it plus interest, but there's no criminal liability. So *whew*! Only need to file 3 years!

But...

Then I started filling in the forms on one of the free tax filing websites. And darn near had a heart attack. Because his income is all from self-employment, the "self-employment tax" came up and said he owed, like, $3000 for last year. I freaked out. There is no way we can afford that. And if he had the same income from a regular employer, he wouldn't owe anything, because of the "foreign income exemption." I knew there must be a way around it, since I know we didn't really make any decent kind of money last year. And besides, he didn't live, work or anything in the US all year (except visit family and take our honeymoon). But professional accountants charge a minimum of $300 per year to prepare cross border taxes.

So I kept looking...

And it turns out that he is indeed exempt from Self-employment tax, because he is covered by the social security programmes in Canada. But we need to provide proof of that. We need to ask the CRA for a Certificate of Coverage under the Canadian-US tax treaty. Here's the link:

http://www.cra-arc.gc.ca/E/pbg/tf/cpt56/README.html

It basically says that hubby pays into Canadian "medicare" and the Canada Pension Plan and, as such, should not be double taxed by the US. So once we have that we can send in his US taxes and write in that he is "exempt from self-employment tax, see attached form".

I know it's kind of a specific problem, but it might apply to anyone whose US citizen husband is living with them in a country covered by a US tax treaty. And what a giant relief to find out that we weren't going to owe thousands of dollars in back taxes and penalties!

Hope this is helpful!

[Mr.&Mrs.EMB 55]

Very informative. Thank you for taking the time to share.

[serena28 2]

This is really good information. I just had a very hard time preparing our tax this year because of all the US States involved. Not that any of us live in Canada anymore, this information will definitely help in the future if we ever decide to move there.

Thanks!!!