reporting 401(a) cashout

chotasahib · Post by **chotasahib** » Tue Nov 09, 2010 12:23 pm

I'm a US citizen / PR living in Canada since 2007. Have used the foreign tax credit to good effect with the IRS, so far. This year will be more complicated, I think. I left behind a 401(a); originally had no intention of touching it, but I had extenuating circumstances come up, and I have cashed it out and moved most funds to Canada. Didn't like having to go this route, but I had to, and it's done.

So...how do I report this mess to both countries in my world income? There are two US vendors involved, and both withheld the obligatory 20%. No contribs have been made since 2006. Do I start with CRA and enter the withdrawn total as "other income"? If it's that straightforward, then I suppose I work out my FTC via form 1116 again, and see how I stand with my 1040 filing (where I realize I will take a 10% hit on this withdrawal, since I am pre-retirement age).

Somehow I am betting this will be anything but straightforward.

Thanks for any advice.

nelsona · Post by **nelsona** » Tue Nov 09, 2010 1:37 pm

As you said, you will add this income to BOTH your US and Cdn returns (the mechanics are unimportant at this time).
After you determine your US tax rate on that income (it won't be the 20% flat that was deducted, it will probably be less), you will use this as your foreign tax credit on your Cdn return. You cannot use the 10% early withdrawal penalty on your Cdn return.

It will be the reverse of what you've been doing in the past, since now you are dealing with US-sourced income on which the foreign tax credit must be taken in canada.

chotasahib · Post by **chotasahib** » Tue Nov 09, 2010 1:42 pm

Thanks, Nelson, that makes sense.

Now, when I do that--apply the foreign tax credit on the Canadian side--it does not in any way reduce what I can claim going the other way (IRS) for my Canadian-sourced income, right? Since my accrued tax will be the same, that is. I hope that's correct.

nelsona · Post by **nelsona** » Tue Nov 09, 2010 1:57 pm

Basically. Just remeber that your accrued Cdn tax is proportioanl to the Cdn-sourced income, not the total income.

chotasahib · Post by **chotasahib** » Tue Nov 09, 2010 2:32 pm

Thanks again. The two-way foreign tax credit situation does my head in, but you've pointed me in the right direction. I wish there was a sfwr package that was adept at cross-border taxes.

nelsona · Post by **nelsona** » Tue Nov 09, 2010 4:12 pm

Oh, the major firms all have software that can handle this.; costs thousands. However, one has to be able to tell the software what to do.

chotasahib · Post by **chotasahib** » Sun Mar 20, 2011 12:01 pm

nelsona, rather than starting a new thread, I'm reviving this one, as it's the same topic. Previously, you wrote:

"After you determine your US tax rate on that income (it won't be the 20% flat that was deducted, it will probably be less), you will use this as your foreign tax credit on your Cdn return."

This is precisely where I'm now stuck, in what feels like some kind of corss-border recursive hell loop! Would dearly appreciate any pointers. I'm at a point where it seems like I can't finish my 1040 (with 1116 and AMT, etc) until I have fuller info from my Canadian T1...which I can't finish until I have fuller information from my 1040!

Let me make up some play numbers for illustration: call my 2010 household income $100,000 in wages, all Canadian-sourced. Call the 401(a) balances that I took as lump sum $50,000, obviously all US-sourced. Let's pretend that the exchange is parity and therefore moot.

I fill in as much as I can on 1040: $100,000 of wages, $50,000 on line 16a; so AGI is $150,000. I do the exemptions and tax owing, no prob, but then I get to the AMT line, which requires 6251. Which asks me to compute an AMT foreign tax credit, which I can't do since I don't yet know what I'll owe CRA. (And a few lines later on the 1040 I'll come to the actual FTC and form 1116; same problem).

So, over to the Canadian side of things, I start mine-and-spouse's T1s. All goes well until I get to the federal FTC using T2209. First of all, I'm not sure if these distributions are business or non-business, and I've read the definitions over and over. I think non-business makes more sense. Let's just say I've got that right, for now: line 431 asks what I paid in foreign tax on that $50,000. I'm not sure how to work that out...is it predicated on my US marginal rate?

There's probably something glaringly obvious, here, that I'm staring right past. At least, I hope so.

ExpatAmerican · Post by **ExpatAmerican** » Mon Mar 21, 2011 12:20 pm

You know, chotasahib, I know that you indicated that you have cashed these 401(a) out already. But as a reminder, if you have done this less than 60 days ago, you can still roll them over to a self-directed IRA and avoid the tax and the 10% penalty (assuming you are under 59.5 years old). Had you considered that, or is it past your 60 days?

ExpatAmerican

chotasahib · Post by **chotasahib** » Mon Mar 21, 2011 2:10 pm

Thanks, Expat. It's passed 60 days, and I had needed the funds immediately, so that's already water under the bridge.

chotasahib · Post by **chotasahib** » Mon Mar 21, 2011 2:11 pm

passed = past

Ugh. Been that kind of day!