The Tax Cuts and Jobs Act, commonly referred to as the US Tax Reform Bill, came into effect on January 1, 2018. Among the numerous changes it makes to the tax treatment of individuals in the United States are changes to deductions on the taxable income of individuals. All of these changes are temporary and are due to expire on December 31, 2025. We present these changes and how they effect both Americans and Canadians who earn income in the United States.
The Standard Deduction
All US resident taxpayers are entitled to a standard deduction, which is a fixed amount that they may subtract from their income before individual income tax is applied. The US Tax Reform Bill nearly doubles this deduction. The standard deduction available to single filers is raised from $6,300 USD (in 2017) to $12,000 USD and the standard deduction available to married joint filers is raised from $12,600 USD (in 2017) to $24,000 USD. Canadians who are not US tax residents are not entitled to the standard deduction.
Like the standard deduction the personal exemption is a fixed amount that an individual taxpayer may subtract from his or her income before individual income tax is applied. In 2017, the personal exemption was $4,050 USD. Unlike the standard deduction, the personal exemption was not limited to US resident taxpayers; Canadians could also claim it on income that they earned in the United States. The US Tax Reform Bill suspends the personal exemption until January 1, 2026. Canadians who earn rental income in the United States will see their US tax liability increase as a result of the suspension of the personal exemption.
Deduction for State and Local Taxes
Before the passing of the US Tax Reform Bill, individual taxpayers could claim a deduction for state and local taxes regardless of the amount paid. This law caps the deduction for state and local taxes at $10,000 USD. This cap will affect Americans and may potentially affect Canadians who earn income in the United States.
Mortgage Interest Deduction
US tax residents are entitled to deduction for payments of interest on a mortgage. Before the enactment of the US Tax Reform Bill, interest payments could be deducted for debt of up to $1.1 million USD. This cap has been decreased to $750,000 USD.
The comments offered in this article are meant to be general in nature and are not intended to provide legal advice regarding any individual situation. Before taking any action involving your individual situation, you should seek legal advice to ensure it is appropriate for your circumstances.
About the author
Sergei Titorenko is an Associate at Levy Salis LLP and a member of the Quebec Bar. He devotes his practice to US and Canadian tax and estate planning, Canadians doing business in the United States, Americans living in Canada, US real estate transactions for Canadians, and cryptocurrency transactions.