Tax Return to File First When You are An Expat
Wherever an expat lives around the world, as a green card holder and a U.S. citizen, he must file the U.S. tax returns. Considering between the U.S. and your local country’s tax returns, you might think that filing one first over the other is essential. In reality, no matter which tax return you file has no bearing on your tax duties.
Filing Between Two Countries
You can choose which between the two countries to file a tax return first. If you claim credit in one country, the refund you receive in that country will reduce your confidence in the other country. To further explain this process, we will set Canada as an example, but any of the other countries you stay will have the same considerations.
If you are staying in Canada and you choose to file your tax return in that country first, the lesser amount you pay in Canada will add into your U.S. tax payment in succeeding year. The same thing will happen if you chose to file a U.S. tax return first for 2016 in 2017, then your Canadian return afterward.
In this case, you have already received a refund in Canada last year for your tax paid in the U.S. This refund would fully offset the Canadian taxes. This year, due to increased U.S. income, there is no amount to offset your U.S. tax bill.
Methods of Filing
To avoid experiencing double taxation, you have several options to consider.
First, the tax that you pay in Canada this year may fully offset your U.S. tax bill the following year.
Second, you can claim an income tax paid in the U.S. after you file an amended tax return in Canada. This would seem like a great choice because you can only take a $4K credit on your Canada tax this year. Once you get the refund, you will have paid the $6K fee in Canada applicable as your 2017 credit in your tax return in the U.S. in the following year.
Third, for the tax you pay in Canada now, you can take a U.S. tax credit and get away from the U.S. tax bill. You will get the same net result. This method, however, would require you to switch to the “accrued tax” method of credit basis.
The last option may remove your current U.S. tax bill, but there is one disadvantage for this third option. After you switch to the accrual method, there is no more possibility of going back to the actual basis of the tax you paid. Choosing this method is not temporary.
Cash vs. Accrual Method of Tax Filing
The difference between these two lies in which year the tax income and expenses are recorded. In cash basis, each transaction is recorded as the money changes hands. Whenever you receive money, it is recorded as income. Each time you pay, the expenses are recorded. For instance, when you send out an invoice for August 30, but it was paid on September 5, the payment is recorded on September 5.
In the accrual method, the transactions are recorded during the times they were established, i.e., when you received the bill or sent out an invoice.
Choosing one over the other is essential for your business, especially for tax purposes. If ever you intend to change your accounting method, you must first get an IRS approval.