January 2013 Archives

January 28, 2013
Posted by Sanger & Manes, LLP

I'm a Canadian Visiting the Palm Springs Palm Desert Area for the Winter, What Should I do About My Health Insurance (Part 1)?

We will finish our entry on Canadians doing business in the United States shortly, but let's focus on health care for the moment.

Will Canadian Health Care Coverage Pay for Costs Incurred Outside the US?
Canadian provincial health care coverage may not pay for all the health care costs incurred outside the province or country, and the difference can be substantial. For example, B.C. pays $75 (Cdn) a day for emergency in-patient hospital care, while the average cost in the U.S. often exceeds $1,000 (US) a day, and can be as high as $10,000 (US) a day in intensive care. Reimbursement is made in Canadian funds and does not exceed the amount payable had the same services been performed in the province. Any excess cost is the responsibility of the beneficiary. For complete travel protection for emergency care resulting from an accident or sudden illness, additional medical insurance should be purchased from a private insurance company. This applies whether one is going to another part of Canada or outside the country, even for only a day

But There is Supplemental Insurance

In general, Canadian residents who have coverage with their government health plan and who apply for coverage prior to departing, are eligible for supplemental health insurance. Persons over age 60 may require a complete Health Declaration as part of their application. Check the inclusions, exclusions and limitations of the private insurance policy carefully. The policy should include emergency medical and dental coverage, including physician, dental and professional fees, hospital fees, nursing fees, drug costs, diagnostic services such as laboratory and X-rays, and incidental hospital expenses such as television. Ambulance service to the nearest hospital should also be included. If ambulance service is required while in another province or outside Canada, fees charged are established by the provider. Fees may range from several hundred to several thousand dollars.

Additional Provisions

Additional provisions to look for include repatriation costs to pay to return the insured to his home province for immediate medical attention, cost of returning the insured's vehicle and pet, and should an insured person pass away, the cost of repatriating the deceased. Some policies cover the cost of transportation for a family member or friend to visit a sick or injured person in the hospital. Also, check to see if the insurance provider will cover expenses up front, which is preferable, or whether the policy holder has to pay for hospital bills and then be reimbursed by the insurance provider.
Be aware, the insurance company is not your friend. Every claim is meticulously examined to find a reason to reject it. When applying for insurance, answer every question as accurately and honestly as possible. Any mistake on the initial application, no matter how innocent, can be a reason for the claim to be rejected. Disclose all medical conditions and medications. If there is confusion regarding a question, seek guidance from a health-care professional. A dangerous practice is to not disclose a doctor's recommended treatment or medication change as this could invalidate the policy. If a doctor recommends a treatment, and you do not comply, or recommends a change in medication, and you do not comply, the insurance provider will treat this as an unstable pre-existing condition and the claim will be rejected. Also, if there is a new medical condition or medication while an annual policy is in effect, it is best to inform the insurance provider to avoid a pre-existing condition label. As long as a reported pre-existing condition meets a minimum stability period, insurance will be issued.


We will discuss more, in Part 2....

January 14, 2013
Posted by Sanger & Manes, LLP

I'm Selling Real Estate in 2013 (Let's Say in the Palm Springs Area), Help Me Understand the New 3.8% Surtax on the Sale (Part 2)...

Nothing brings a new law home like some examples, let's take a look:


1.) A single individual with a salary of $210,000, which exceeds the $200,000 threshold, could be subject to the 3.8% tax IF he also has "net investment income."

2.) A married couple with a combined income of $275,000, which exceeds the $250,000 threshold, could be subject to the 3.8% tax IF they also have "net investment income."

3.) A married couple have an Adjusted Gross Income (AGI) of $175,000, less than the $250,000 threshold, but have a "net investment income" of $100,000. Their Modified Adjusted Gross Income (MAGI) (MAGI = Adjusted Gross Income + "net investment income") is $275,000 ($175,000 + $100,000), exceeding the $250,000 threshold, making them subject to the tax.

4.) A married couple have an AGI of $240,000. Their total "net investment income" is $6,000, $2,000 of interest and $4,000 of dividends. The 3.8% tax would not apply even though they have "net investment income" as their MAGI 0f $246,000 ($240,000 + $6,000) is below the $250,000 threshold. But if they have the same interest and dividends plus a $10,000 capital gain, their MAGI would be $256,000. The excess of MAGI over the applicable threshold amount of $250,000 would be $6,000 ($256,000 - $250,000) and their "net investment income" is now $16,000 ($2,000 of interest, $4,000 of dividends and $10,000 of capital gains). Since $6,000 is less than $16,000, and the tax is calculated on the lesser, the 3.8% tax would be applied to the $6,000 and the tax would be $228 ((3.8% x $6,000).

5.) A married couple, purchased their primary residence 20 years ago for $100,000 and have lived in it since that time. Today, it is worth $700,000. If they sold it their profit would be $600,000. The first $500,000 of profit for a married couple selling their primary residence and meeting the ownership and occupancy tests would be tax-free, because of the couples federal home sales profit tax exemption of $500,000. The remaining $100,000 profit ($600,000-$500,000 exemption) would be "net investment income." The question would then be are they subject to the new 3.8% tax? That depends.
If their AGI was $175,000, the $100,000 "net investment income" capital gain profit would then be added to their AGI for a MAGI of $275,000 ($175,000 + $100,000). If the MAGI totaled less than $250,000, the new tax would not apply although they would still have to pay the capital gains tax on $100,000 profit. In this example, as the MAGI is $25,000 greater than the $250,000 threshold ($275,000 - $250,000), the new tax would apply. The new 3.8% tax applies to the lesser of the "net investment income," in this case $100,000, or the $25,000 that their MAGI exceeds $250,000 for a couple filing a joint return. As $25,000 is less than $100,000, the additional tax would be $950 (3.8% of $25,000).

6.) A married couple sold their principal residence for $525,000. They originally purchased it for $325,000. Their gain is $200,000, but they satisfy the ownership and occupancy requirements for the $500,000 couples federal home sales profit tax exemption of $500,000) and after applying the exclusion they have no capital gain and there "net investment income" is zero. Even though they have $300,000 of AGI, they are not subject to the new 3.8% tax as they have no "net investment income."

7.) A married couple inherited stocks and bonds that they liquidated. The sale
of these assets generated a capital gain of $120,000. Their AGI is $140,000 and their MAGI is $260,000 ($120,000 + $140,000). The excess of MAGI of $260,000 over threshold $250,000 is $10,000 ($260,000 - $250,000). The new 3.8% tax applies to the lesser of the "net investment income," in this case $120,000, or the $10,000 that their MAGI exceeds $250,000 for a couple filing a joint return. As $10,000 is less than $120,000, the additional tax would be $380 ($10,000 x 0.038).

8.) A married couple have total investment income from bonds, CD's, dividends, and capital gains of $145,000. Their AGI is $190,000 and their MAGI is $335,000 ($145,000 + $190,000). Their excess MAGI over the threshold of $250,000 is $85,000 ($335,000 - $250,000). The new 3.8% tax applies to the lesser of the "net investment income," in this case $145,000, or the $85,000 that their MAGI exceeds $250,000 for a couple filing a joint return. As $85,000 is less than $145,000, the additional tax would be $3,230 ($85,000 x 0.038).

9.) A married couple own a vacation home they purchased for $275,000. They have never rented it to others. They sell it for $335,000 and their second home sale capital gain is $60,000 ($335,000 - $275,000). The home sale profit exemption does not apply to second homes. In the year of the sale their AGI is $225,000 and their MAGI is $285,000 ($225,000 + $60,000). Their excess MAGI over the threshold of $250,000 is $35,000 ($285,000 - $250,000). The new 3.8% tax applies to the lesser of the "net investment income," in this case $60,000, or the $35,000 that their MAGI exceeds $250,000 for a couple filing a joint return. As $35,000 is less than $60,000, the additional tax would be $1,330 ($35,000 x 0.038).

January 8, 2013
Posted by Sanger & Manes, LLP

I'm Selling Real Estate in 2013 (Let's Say in the Palm Springs Area), Help Me Understand the New 3.8% Surtax on the Sale (Part 1)...

Beginning January 1, 2013, a new 3.8% unearned Medicare income tax will be levied under IRS Section 1411(a)(1) on some "net investment income." This tax is designed to raise an estimated $210 billion to help fund Medicare and health care reform. The tax will apply to the lesser of "net investment income" or the dollar excess of "Modified Adjusted Gross Income over the applicable threshold amount". The 3.8% tax applies in addition to any other taxes that otherwise would apply to the associated income.

It is not true, as some frightening emails have suggested, that the new tax is a sales tax on the total sale price, nor is it true that it will affect all home sales or even most home sales. It is not true, as the emails have reported, that it would cost an additional $3,800 (3.8% x $100,000) in taxes to sell a $100,000 home.

What is Net Investment Income?

The first test for determining the amount of income subject to the 3.8% tax is determining the "net investment income," which includes income from capital gains (less capital losses), rentals (less expenses), dividends, annuities, and royalties. It also includes income derived from a passive activity such as real estate investing and from income derived from a net gain attributable to the sale of property including a home. Income associated with a normal business in which the individual materially participates is not subject to the tax. Also, distributions from a retirement plan are not subject to the tax.

What is the Modified Adjusted Gross Income over the applicable threshold amount?

The second test for determining the amount of income subject to the 3.8% tax is the dollar amount of Modified Adjusted Gross Income (MAGI) greater than the applicable threshold amount. For an individual filer the applicable threshold amount is $200,000 and for a married couple filing jointly the threshold is $250,000. Modified Adjusted Gross Income (MAGI) = Adjusted Gross Income + "net investment income." Home sale profits are capital gains and are considered to be investment income.

What About Code Section 121, Which Permits an Individual to Exempt $250,000 in Capital Gains from the Sale of a Primary Residence?

If certain ownership and occupancy requirements are met, capital gains from the sale of a primary residence less than $250,000 for an individual and less than $500,000 for a couple filing a joint return are currently exempt and will continue to be exempt from taxation. The vast majority of home sellers will not be subject to the new 3.8% tax. In July 2012, the median sales price for existing homes was $181,500. Homes that sold for more than $500,000 accounted for only 11% of home sales. To qualify for the home sale profit exemption, the sale home must be a primary residence which the seller owns and has lived in for two-of-the-last-five years prior to the sale. Husbands and wives can each claim a $250,000 exemption on a joint tax return if both spouses meet the two-of-the-last-five year occupancy test, although only one spouse need meet the ownership test. Two co-owners not married to each other who meet the ownership and occupancy tests can each claim up to $250,000 tax-free home sale profits. Those homeowners who cannot meet the full ownership and occupancy requirements for capital gain exclusion may qualify for a partial exclusion equal to the fraction of the time that the ownership and occupancy requirement are met.

Note, the home sale profit exemption does not apply to second homes or to property owned solely for investment purposes. In those cases, the usual ordinary income or capital gains rules apply.

Are Canadians or Other Non-US CItizens Subject to the New 3.8% Tax?
Canadians, or other foreign nationals owning a second home in the U.S. would not qualify for the exemption, but nor are they subject to the new 3.8% tax.

What About Estates and Trusts?

The new 3.8% tax will also apply to estates and trusts. For estates and trusts, the tax is equal to the lesser of the estate's or trust's undistributed net investment income, or the excess of the estate's or trust's Adjusted Gross Income (AGI) over the dollar amount at which the highest tax bracket begins for such taxable year.


We'll run through some examples, in Part 2....

January 2, 2013
Posted by Sanger & Manes, LLP

A Canadian Who Lives Part-Time in California (Maybe Palm Springs, Maybe Los Angeles) Would Like to Start Doing Some "Side Business" or "Side Work" in California, Will the Canadian Owe US and California Tax? Part One....

Frequently at gatherings I'm asked tax questions related to Canadians and their tax issues in the US. At a recent holiday gathering, a nice gentleman, who is a terrific interior designer in Calgary I believe, asked about the possibility of doing some interior design work for Canadians who also had a second home in California (most likely in the Palm Springs area). So he asked me, if he did some interior design work for Canadian customers in their California homes, would he be subject to US (and California for that matter) tax?

A terrific question, so let's review....

First, Is it a Big Deal if the Canadian has to Pay US Tax to Do Business in the US? I Don't Think So...

Personally, I don't think it is a big deal if a Canadian, who wants to conduct business in the US, has to pay tax in the US. The US and Canada have a very progressive tax treaty with each other, and there is a tax credit system honored by both countries. So let's start with this premise: just because the Canadian may pay tax in the US on the business income does not mean he or she will have to pay a double tax (once in the US and once in Canada) on the same income. Most likely, because of the treaty and credit system, the Canadian doing business in the US will pay no more federal tax than if he or she were doing business in Canada, they just might now pay some of that tax to the US government instead of the Canadian government. So the Canadian should not let fear of additional taxes stop he or she from doing business in the US, because there probably won't be much (if any) extra federal taxes for doing business in the US. There maybe an additional state tax to the state of California, however, because there is no Canadian tax credit available for state taxes.

Second, the Canadian doing Business in the US May Need to Enter the US on a Different Visa.

Most Canadian snowbirds are in the US as tourists - for fun and recreation. They can stay up to 6 months a visit, just by showing their passports at the border. But this is for tourism, not for business. If you're going to be doing work in the US, you don't want to lie to the border guards. And so, the Canadian snowbird who wishes to do steady work in the US may wish to apply for the E-2 Visa, so as to be able to work regularly in the US without problems. A project or two in the US, maybe don't worry about a new visa (although you may be a little nervous at the border). Consistent and regular work in the US, the Canadian should consider applying for the E-2 Visa.

What are the General Rules on When Any Non-US Resident is Subject to Tax in the US?

Under UStax law, a Canadian (or any non-US resident) is subject to US federal tax if they have income that is "effectively connected with the conduct of a trade or business within the United States". This is an ongoing test, which means that if you carry on a trade or business in the US at any time in the year, you will be subject to US tax for that particular year. If you are engaged in a US trade or business, you will be taxed in the US at graduated rates on a net basis on income that is effectively connected with the conduct of that US trade or business. The good news is, the non-US resident will be allowed to claim deductions to reduce the effectively connected income, but only to the extent that the deductions are connected with that income. The ability to claim the appropriate US deductions can keep the US tax element quite reasonable.

How Can We Tell if We Have Income Which is Effectively Connected with the Conduct of a Trade or Business within the United States?

There is no clear answer to this question, it comes down to facts and circumstances test. The level of activity required for effectively connected to a "trade or business" status in the US is relatively low. The following situations could mean that you are subject to US tax (again, these examples are for any non(US) resident alien, we will consider how the US-Canada Treaty loosens these rules for Canadians in the next post) :

A) If the nonresident alien makes sales into the US market, he or she may have a U.S. trade or business. If, however, he or she is merely accepting unsolicited purchase orders from US customers, will probably will not be considered to be carrying on business in the US.

B) The nonresident alien may be considered as having a US trade or business if he or she has employees or agents travel regularly to the US to make sales calls or if your employees or agents are doing marketing, demonstrating goods, or soliciting orders in the U.S.

C) If the nonresident alien (or his or her employees and/or independent contractors) performs employment or self-employment services in the US, they are likely considered to be carrying on a US trade or business. For example, if the non US resident alien goes to the US on consulting contracts and work at customer sites, he or she will likely be considered to have a U.S. trade or business.

Note, this last example (Example C) seems to clearly indicate our Canadian interior designer will be subject to some US taxes for doing interior design work for houses located in the US. And once again, except for the fact that the Canadian interior designer may wish to obtain a different Visa (probably the E-2), this should not be a big deal (at least for total federal taxes owed, whether to Canada alone or to Canada and the US). But does our Canadian interior designer really have to declare income in the US, or does the US-Canada Treaty offer relief from the general rules? We will look more closely at this in Part 2 of this series....