Originally published in Canadian Tax Highlights, Volume 22, Number 1, January 2014. Reprinted with permission.
No significant US tax changes are set to take effect in 2014; in contrast to last year, taxpayers are not standing on the edge of a fiscal cliff. Recently, however, the IRS released final Treasury regulations (TD 9644, November 26, 2013) for the 3.8 percent net investment income tax (NIIT) and confirmed that FTCs cannot offset it. A US citizen living in Canada who previously used FTCs to eliminate US tax may owe US tax for 2013.
The NIIT applies to a US taxpayer whose modified adjusted gross income (MAGI) is at least $200,000 (a single filer) or $250,000 (joint filers). The taxable amount is the lesser of (1) the excess MAGI over the taxpayer’s threshold and (2) the taxpayer’s net investment income, which includes interest, dividends, capital gains, rental and royalty income, income from businesses involved in trading financial instruments or commodities, and income from businesses that are passive activities to the taxpayer (Code section 469).
The final regulations explicitly confirm that FTCs cannot offset the NIIT. As discussed in an earlier article (“No FTC for Medicare Surtax,” Canadian Tax Highlights, March 2013), the denial of an FTC seemed clear in the Code, but commentators questioned whether that result was intended. The confirmation changes nothing for US taxpayers aside from providing clarity: under the Code, FTCs only offset a chapter 1 tax, and the NIIT falls under chapter 2A. Thus, beginning with 2013 tax filings, many Canadianresident US taxpayers who historically paid little or no US tax may find themselves with US tax liabilities.
The 2014 individual income tax rates remain unchanged, but the income thresholds increase for inflation. In 2014, the highest rate of 39.6 percent applies to a single filer whose taxable income exceeds $406,750, to joint filers whose taxable income exceeds $457,600, and to a married individual filing separately whose taxable income exceeds $228,800. An individual who is subject to the highest income tax rate is also subject to a 20 percent tax rate on capital gains and qualified dividends, but an individual in the 15 or 10 percent bracket continues to enjoy a 0 percent tax rate thereon, and other taxpayers continue to enjoy a 15 percent tax rate thereon. The alternative minimum tax exemption amount also increases for 2014 to $52,800 for a single filer, to $82,100 for joint filers, and to $41,050 for a married individual filing separately.
Also for 2014, the annual exclusion for gifts remains at $14,000 per donee, while the annual exclusion for gifts from a US-citizen spouse to a non-US-citizen spouse increases to $145,000. When inflation adjustments are rounded out, the unified credit against estate tax increases to $5,340,000 for 2014. The top US estate tax rate remains at 40 percent.