A major factor in the U.S. fiscal crisis was the policies which encouraged banks to give out sub-prime mortgages. Canada did not impose such policies on their banks and thus avoided the crisis almost entirely. Not one Canadian bank had to be bailed out. The Minister of Finance ended all government-backed insurance of low down payments and low amortization periods for home mortgages. Taxpayers are no longer responsible for taking on risky debt.

A speech explaining the government’s view of this crisis can be viewed here.

To summarize the issues at question, the court was asked to determine the rules regarding practicing before the IRS. Under the law as it is written, the IRS is permitted to determine who is permitted to practice before the IRS, meaning representing clients in audits & appeals. The IRS implemented the practice of requiring registration by stating that tax return preparation was considered practicing before the IRS. The plaintiffs in the case argued otherwise. The judge sided with the plaintiffs.

With the court ruling, the PTIN requirement is still permitted. However, the change here is that there are no requirements to get a PTIN number. Any individual who wants to prepare returns can now get a PTIN number if they are willing to pay the $63 US application fee.

With this change allowing anyone to get a PTIN number, what can people do to ensure they are using a competent tax preparer as opposed to anyone who can pay the fee? Note that we are not arguing the merits of tax preparer licensing. That is a political matter and anyone can have their own opinion on the subject.

The following are some suggestions to ensure that your tax preparer is competent and capable of preparing your returns. (These factors are geared toward the US expats in Canada)

1)     Hire our firm to prepare your return:

a) Our firm is experienced in dealing with Expat US tax and our people are experts on the subject.

2)     Hire an attorney, United States CPA or Enrolled Agent (EA) that has experience in Expat taxes: These 3 categories of preparers have already completed a difficult licensing exam; therefore, they would be more likely to be competent than someone with no licensing.

3)     Other factors that should be considered red flags. If you see these things, hire someone else:

a) You pay someone to prepare the return and the paid preparer sectionshows one of the following 4 descriptions:

i.     Is blank.

ii.     Says self prepared.

iii.     Says the return was prepared by an unpaid preparer.

iv.     Does not show a PTIN number.

b) Has your accountant ever told you the following? If so, run to someone else:

i.     “You don’t owe anything so you don’t have to file.”

ii.     “You only pay tax in the USA on income earned in the USA.”

iii.     “You can’t receive a refund, you didn’t pay anything.”

iv.     “I prepare your US return solely from your Canadian return, I don’t need anything else.”

c) Has your accountant ever asked you any of the following questions? If the answer is no, they may not be competent to prepare an expat tax return for an American citizen in Canada. (If your Canadian accountant prepares the return he may know some answers but will still need many more. These are some important questions, there can be others not listed here that are relevant)

i.     Did your accountant ask you about bank or investment accounts outside the USA.

ii.     Do you know anything about FBAR or FATCA?

iii.     Do you have an RRSP?

iv.     Do you own your own business?

v.     Are you a partner in a partnership or other non-incorporated entities?

vi.     Do you have an RESP for your children?

vii.     Do you have a TFSA for yourself?

viii.     Do you invest in Mutual Funds/REIT’s/ETF’s?

ix.     Do you have a holding company in Canada?

x.     Do you have any connection to an estate or trust in Canada?

xi.     Are your spouse/children US citizens?

1. If yes, did he mention anything about child tax credits or refunds available?

d) Please examine your most recent tax return or ask your accountant about the following forms to ensure they were properly reported in the prior year.

i.     Bank accounts with more than $10,000 in total – FINCEN Form 114

ii.     Total net worth greater than $200,000 – Form 8938 (Sometimes not needed)

iii.     RRSP/RRIF/LIRA – Form 8891 for each account

iv.     TFSA – Forms 3520 & 3520A for each TFSA account

v.     RESP – Forms 3520 & 3520A for each TFSA account

vi.     Ownership of greater than 10% of a Canadian corporation – Form 5471

vii.     Ownership of greater than 10% of a Canadian partnership – Form 8865

viii.     Ownership of Mutual funds/REIT’s/ETF’s – Form 8621

ix.     Transfer of property to a foreign company – Form 926

4)     Some general things to look for:

a) Is the company recommended by the Better Business Bureau or Chamber of Commerce in the region?

b) Are the accountants guaranteeing low prices or large refunds that seem outlandish?

c) Does the person seem too good to be true?

d) Can the accountant provide any references, either directly or from their website?

The above are things that we would advise you to look for in choosing your US tax provider. None of the factors are conclusive by themselves but should provide an indication as to whether the company is capable of looking after your needs.

Tax Rates:

Prior to this law being passed, the Bush tax cuts were set to expire at the end of 2012. All rates would have gone up for all taxpayers. As part of the ATRA, the 2012 tax rates were made permanent with one additional bracket. This new bracket will begin at $400,000 for single filers, $425,000 for head of household and $450,000 for those filing jointly. With these rates now being permanent and being indexed annually for inflation, individuals will be able to plan their affairs without worrying about rates expiring. The following tables will show the expiring rates, what the rates would have been without the ATRA and what the rates will be going forward.

Note that rates for those married filing separately are always 50% of the married filing joint.

Impact on Canadians

This new law will be beneficial to Canadians. With the lower rates being made permanent, most working Canadians will be able to continue not owing very much each year to Uncle Sam. However, those wealthy individuals who have large deductions in Canada might find themselves in a situation where they are unsure from year to year as to whether they owe money.

Extension of Capital gains and dividend rates:

Prior to this law, the reduced rates on Dividends and capital gains would have been eliminated. This would have resulted in dividends and long term capital gains being taxes as ordinary income. Under the Bush cuts, qualified dividends and long term capital gains were taxes at 15% flat. In addition, those people in the 10% bracket paid no tax on dividends or long term capital gains. The new law extends the 0 and 15% rates across the board and establishes a 20% tax on those in the highest income tax bracket.

Impact on Canadians:

The extension of these tax rates is beneficial. Had this law gone into effect, these items would be taxed as ordinary income and that would have resulted in much higher taxes on these items in the USA than in Canada. This could have left many average Canadians with taxes payable in the USA each year. This would have especially hit retirees hard with much of their incomes being investment based, rather than employment based. With these new rates in effect, the current system where Canadian taxes should cover the American taxes due will continue. The only people who are likely to have taxes due are the wealthier Canadians with long term gains as Canada generally taxes these at lower rates.

Alternative Minimum Tax (AMT)

Prior to this law being passed, AMT was expected to hit in 2013 at $33,750 for individuals, $45,000 for couples & $22,500 for those married but filing separate returns. This would have meant many Americans being caught by AMT. Even more so, those living abroad and filing separately as their spouse has no obligation, would almost certainly be caught by AMT. With this law, the AMT hits now at $50,600 for individuals, $78,750 for those married filing jointly and half of that for those filing apart from their spouse.

Another benefit to this law is that now AMT is to be indexed annually for inflation. It used to be that congress needed to pass a patch for AMT annually in order for it not to keep capturing more and more people. With this indexation, fewer people will be trapped annually.

Impact on Canadians:

Once again, this law brings positive news to Americans in Canada. With the higher exemption amounts, fewer Canadians will be caught. In addition, with the rates being fully indexed for inflation, there will be no annual worries as to whether someone will be caught by AMT.

Estate tax:

Prior to this law passing, it was expected that the estate tax rate for 2013 and subsequent years would be 55% for estates valued at above $1M. For those dying in 2012, the tax rate was 35% on estates larger than $5.12M.  With this new law, the 2012 limits are now permanent and will be indexed for inflation. The expected exemption for 2013 is approximately $5.2M. The tax rate on these estates will be 40%. In addition, the exemption amount can now be transferred between spouses, allowing for a much larger exemption for a family.

Impact on Canadians:

This law will impact all Canadians who have US estate tax liability. However, those families with estates between 1M and 5.2M will now not be required to pay anything. This will greatly reduce the number of Canadians with exposure to US estate tax.

Another group who may benefit from this are those who own real estate in the US. As estate tax is charged on all US property, Canadians owning property can be subject to estate tax. The increased threshold and reduced rate from what were the expected rates is a welcome change as it will exempt many Canadians from these taxes. The same formulas as before will be in place to calculate non-resident exemptions so this will just increase the exemption amount from what was expected.

Child tax credit/Additional child tax credit:

This is one of the few refundable credits available to Americans living abroad. In 2012, this credit was worth $1,000/child and it was scheduled to become $500 in 2013. However, with the passage of this law, the credit is permanently restored at $1000/child going forward. The refundable portion is set at $1000/child through 2017.

Impact on Canadians:

The extension of these credits is good news for Americans in Canada who are raising children. Through proper tax planning, they will now be able to get a refund of $1000/child without paying anything into the system up front.

These are some of the key features in the fiscal cliff law that will impact Americans in Canada. There are some other general clauses or businesses laws in place as well. For a summary of the law and other attributes, check out the following website. http://www.parkertaxpublishing.com/public/ATRA_2012_Analysis.html?goback=.gde_1884032_member_201223333

If you have any questions regarding how the fiscal cliff impacts you, your family or your business, make an appointment with our tax experts to guide you through and to help you plan for dealing with the American tax code.