Tag Archives: cross-border income tax

Donald Trump’s Income Tax Return

Some of the Democrats have complained that Donald Trump has stated that he will not release his current income tax return until after the audit is finished. I think that this is reasonable.

Someone found a copy of his 1995 return in which he showed a huge Net Operating Loss. The calculation of the NOL is complex and difficult. I have only prepared a couple of them. They often take a couple of hours to fill in. The corresponding Canadian form takes only a few minutes.

The concept of Net Operating Losses is to decrease the effects of varying income levels. A typical one would be for someone like a realtor who made money when real estate was moving in the early 2000s and had huge losses when the real estate market died, because he was still making the same advertising expenses. Companies in mining or oil exploration would have the same problems. The NOL permits taxpayers to decrease the tax on other years to compensate for the losses of the loss year.

People whose income varies from year to year are quite likely to use NOLs. Some examples are a newspaper, a grifter, and an angel investor. I specifically mentioned these because the New York Times, Hillary Clinton, and Mark Cuban all recently condemned Trump for using NOLs recently without realizing that they had done the same. I have no idea why Mark Cuban made such a stupid mistake. Until recently I thought that he was smarter than that.

I would not expect to see anything interesting in Trump’s tax returns in any case. Anyone buying real estate developments in the US has to form a new corporation for each project. If the address is 123 Main Street you would try to set up a corporation with a name like 123 Main Street Ltd.

This is necessary because there are huge numbers of lawyers who are looking for business and nearly all of them would be glad to get a chance to make a claim against a property owner. Many lawyers make a practice of filing trivial actions against companies like real estate owners in the hope of getting a quick out of court settlement. They typically ask for an amount that is significantly less than the cost of going to court.

Trump says that he does not pay off these shysters. He makes them go to court. If there was only one or two it would be cheaper to pay them off than to go to court. He takes the position that if he paid off one of them he would be besieged by trivial lawsuits.

As a sidelight here, Al Sharpton’s daughter filed a claim against New York City stating that she had sprained her ankle because she tripped on something on the sidewalk. She went ahead and posted photos on the internet of her dancing in high heels later the day of her supposed accident, and climbing a large hill or small mountain a couple of days later. How stupid can they get?

To take money from a corporation to an individual owner is not difficult. The company can pay a dividend, a management fee, a director’s fee, or some similar thing. All of these would simply go onto a form 1099 and these would be added up, either directly or on a schedule C.

In Canada it used to be necessary to have the owner of a private company receive a draw during the year. Near the end of the year the accountant had to figure how much was a salary and how much was a dividend. The objective was to select the distribution of income types to minimize the total tax bill. Similar calculations are done in the US. Naturally they are more complex when a large number of corporations are involved.

There is an additional complicating factor in Trump’s case. Because he has interests in a couple hundred corporations, some of these are probably treated as separate businesses and some of them consolidate the accounts of some other corporations, which are officially owned by the mother corporations instead of the shareholder. It requires some pretty fancy calculations to figure out the best distribution.

In summary I expect that when his 2015 return is published it will not contain anything interesting because it will only show the funds that went from his companies to his personal account. This will be quite close to his cost of living plus whatever additional amount he wants to put into his stock trading account.

If the Dems really wanted to know what was in his tax return they would instead look at the 104 pages that he filed a few months ago. One financial writer looked at this and found that Trump owned a large amount of shares in a particular company that did not fit in with his other investments. He looked at it, examined the company’s filings, and recommended that his readers all buy shares in it.

Saving Receipts

Some people will tell you that you do not need to keep receipts  for deductible expenses. This is not correct. The IRS or Revenue Canada may ask to see your receipts any time that they want to ask.
When they ask it is your duty and responsibility to provide receipts. If you do not do so they may completely eliminate the business expense. You could end up with a big tax bill. Most likely, if this happens, you will be audited for the next 2 or 3 years.

This brings us to the question of how to collect and categorize your business or employee expenses. The system that seems to be simplest is to put all of January receipts in one envelope, all of February in another and so on. This is not a very good system.

A much better system is to look at last year’s tax form and make a list of the types of expenses that are listed. Prepare an envelope for each one. Place the receipts in the appropriate envelope.  The reason for doing it this way is that whoever prepares your tax return will need to sort them into these categories. If they are already in the correct categories this is no longer necessary.

On some occasions I have spent a long time sorting office supplies from internet service etc. Once they are sorted I like to handle them in the easiest way, which is to take a batch of receipts for one thing and enter them all into an adding machine that produces a paper tape. As soon as I get to the end I wrap the tape around the receipts and put a few staples through the package. Then I write the name of the category on the tape and go on to the next batch. With a little practice this becomes very fast and easy to do.

I use the same system for adding up prescription receipts.

I am sending this to you now because I hope that you do not wait until the last minute to start preparing for your tax preparation.

A new feature this year is that the sales tax that you pay on large items may be deductible if you itemize deductions. The sales tax on an SUV may be a very large figure that would look really good on your Schedule A.


Notice to 1040 Extension Filers

If you filed an extension form in April you are expected to send in a complete form 1040 by the middle of October. There is not much time left. If you want me to do it for you please scan the relevant documents and email me the scans. I will prepare the form and send it to you in pdf format. You will print it, sign it and mail it. I recommend making a paper copy as well but this is up to you. Please send the information as soon as possible so that we will have time to exchange emails about anything that is not clear. I would hate to have you miss a deduction because I did not ask enough questions.

Let me remind you that I will need to know about any changes from last year. These changes include marriages, divorces etc. For the last few years the IRS have been stating that if you were married legally in any jurisdiction and have not been divorced you are still married, whether or not your state of residence accepts marriages like yours. This applies to same-sex marriages and heterosexual marriages.

I need to know the name of the county that you live in to make sure that I calculate the sales tax deduction correctly.  Please send me a copy of last year’s form 1040 so that I can get all of your dependents and their Social Insurance Numbers correctly.

If the form seems to be especially complex I will let you know my preparation fee before filling it in. Otherwise I will ask for the average price that is paid in the US.




Cross-border Taxation

There are many potential problems in cross-border taxation. I will refer mainly to people who have to file in both Canada and the US. Typical examples are US citizens who live and work in Canada and anyone who has moved across the border in either direction during the year.

Canada taxes on worldwide income for residents and Canadian income for non-residents. Taxpayers who enter or leave Canada during the year file a return for the part of the year they were resident.
The US taxes people on the basis of citizenship. This is done by only one other country. Sometimes this other country is stated as being North Korea and sometimes it is stated as Eritrea depending on who you listen to. In either case the US is not in good company.

I prepared US and Canadian taxes together for many US citizens who lived in Canada. In only two cases was there any tax due on the US return. People who have jobs or are self-employed in Canada are allowed to deduct Canadian income tax, unemployment insurance, and Canada Pension Plan from US income tax. The sum of these three is nearly always greater than the US income tax would be so it is only a matter of reporting to the IRS, not paying them as well. Almost The only times when additional tax is due is when someone has sold something relatively large and made a capital gain. There are also differences in limits on charitable deductions, and these are often much more restrictive in the US than in Canada.

Going the other way, Social Security and Medicare taxes are added to US and state (and sometimes local) income taxes when figuring credits on Canadian taxes and the sum of these is usually greater than the Canadian income tax would be. Because of these additional charges usually there is no tax obligation in the second country, even if there is a filing obligation.

Often the most work involved in preparing US taxes for a US person who lives in Canada is the banking statements. These are mandatory and they are getting stickier about them every year. At present you must add up the maximum amount during the year in each account and if it comes over $10,000 you have to list all financial accounts that you have signing authority over, including your child’s boy scout troop, your garden club, your AA group etc. These all go onto two different forms. The reason for having to file what is essentially the same information on two different forms is that different groups within the IRS are interested in different aspects of these financial accounts. If this makes sense to you what are you smoking?

Because of all of these factors if you know that you have a cross-border filing requirement check into all of your financial accounts before you go to have your taxes prepared. If you don’t you will likely be sent home to get more data. This will usually result in an extra charge for the preparation because it is a lot more work to prepare a return if you have to do it in two separate sessions. It takes time to get into a return and remember everything that is in it. Even if there is no extra charge it will cause bad feelings all around.

A few years ago I prepared a form for a US citizen living in Canada who had left a large sum of money with an investment adviser in Washington state. He charged her hefty management fees as you might expect. I had to call him about something related to the account. It soon became clear to me that he had no understanding of the fact that because she was living in Canada and in fact had 10 rental properties in Canada that he should have been thinking about exchange rates. He had not even thought about them. The accounts that she had with him showed a moderate income in US dollars but a huge loss in Canadian dollars. IMHO he should have paid some attention to the way exchange rates move so that he would be able to maximize the gain in Canadian dollars but he seemed to be quite incapable of understanding the concept.

I am currently in Guadalajara, Mexico and expect to go to Vancouver, Canada, sometime in March. If you want me to prepare your taxes the easiest thing is to email them to me. If you do so and you have to file US taxes please make sure that you include all of the information about financial accounts.