High Income, Form 2555?

[pleventi]

Hi,

It seems like Form 2555 isn't worth it if you are a high-income individual. If I understand the worksheet correctly, the excluded income only reduces the first $x dollars of income, not at the marginal rate as I would have expected it would. In the event that you have a lot of foreign tax credits, the reduction in foreign tax credit is greater than the reduction in taxes.

Sound right?

- Paul

[nelsona]

That is correct. However, you can use foreign tax credits on the income above the limit.

For typical US citizens living in canada, either way, you shoud not have to pay any tax to US on anything but US-sourced interest, dividends, earned income and real estate.

[pleventi]

I understand that 2555 only excludes some income, and I can use 1116 against the remainder (with adjustments). However, I've found that using 1116 against the full amount yields lower taxes than doing an exemption + credit.

Just wanted to check that this seems right -- from the way the tax reduction from 2555 is computed, it seems that I don't save at my marginal tax rate (e.g. like a normal deduction), but rather save the taxes on my first x$ of income?

[nelsona]

That is correct. Due to anti-stacking provision, If you exceed the earned income limit (which in a move year is pro-rated, btw), you end up being taxed in US at your gross effective rate on the excess, which indeed may be more than your effective Cdn tax on those wages (although i doubt it, considering your effective taxrate will be quite high, and you get to include CPP and EI premiums).

You will do the calculation at year end and choose.