Alternative Minimum Tax

michaelthef · Post by **michaelthef** » Wed Apr 29, 2015 5:05 pm

Hello - wondering if people on this forum could give me their insight / share experiences with AMT. In my 2014 returns, I was surprised to find out that I owed several thousand of AMT. I don't have mortgage interest deductions or other deductions that people typically associated with AMT.

However, in 2014 my spouse took a distribution from her RRSP to collapse it. 25% withheld in Canada and that was itemized in Schedule A. The RRSP was included in line 16a as pension income and there were no gains in 16b since it was held in cash (sold prior to leaving Canada and there was an FX loss).

So what I am wondering is - is it likely that AMT is resulting from taking the RRSP distribution. If so, seems like the economics of taking the RRSP distribution after moving are impacted (I know on this forum we've talked about the benefits of taking it as a US resident with the 25% cdn withholding). The confusing part furthermore is that my AMT amount was 2,200 and the 25% cdn withholding was around 4000. So about half the credit is being erased by the AMT if this is in fact the right way to think about.

Am particularly interested because I have a larger RRSP balance that I was thinking about collapse for the 2015 tax year (this one does have capital gains since moving to US) but am concerned about the AMT impact. May be better to leave it all in Canada for the next 30 years and eventually turn it into a RIF in older age. It's all hedge vs USD as it's invested in a US instrument - so I may be fine to leave it in there for the long term. I do not expect to return to Canada.

If the above is not likely to be relevant to the AMT, any ideas what else could be causing it?

Thanks much.

nelsona · Post by **nelsona** » Wed Apr 29, 2015 5:23 pm

If you don't have AMT before putting the Cdn tax and you do after, then there is your answer.

I have always warned people that using the NR tax as a deduction might trigger AMT.

I'm curious as to what other deductions you are using that would drive AMT? Remember that cap losses also factor into this.

nelsona · Post by **nelsona** » Wed Apr 29, 2015 5:26 pm

the solution of course is to not collapse entire RRSPs in one year.
Since you have waited, I would begin the draw down slowly, and if, you really want to reduce taxes, put it into a RRIF now, and draw down 10% a year at 15% tax.

You need to take a look at your AMT calcs to see what it is using as the taxable amount (could it be 16a is included).

You'll have to play with the software

michaelthef · Post by **michaelthef** » Wed Apr 29, 2015 5:34 pm

Got it thanks for the reply. It's interesting because I may need to run a hypothetical scenario for the 2015 year to decide if I should do the larger RRSP collapse.

I can probably go through the returns prepared by my tax accountant and do what you suggested - meaning to remove the deduction and see if AMT is calculated. I presume I should also remove the income from the pension on the 1040 to get the answer right? Meaning just see what the numbers shake out to be had I not done the RRSP collapse.

As far as other deductions, I really don't have any. A few hundred of charity and negligible interest expense on investments. So on my schedule A it's all my state taxes that are contributing to the deduction. My tax prep fees, though larger than I would have liked at $4700 get no credit due to income .

Cap gains is neutral (some losses and gains so ends up at $50). Better luck this year... Had about 500 in dividends.

Lines 48-54 of the 1040 only have the Foreign Tax Credit. So I think it's gotta be the RRSP collapse that is triggering this. Interestingly the RRSP was only $15k canadian. Not a large number... Glad I didn't do the larger one last year. Would have been painful to pay a large AMT.

Wish I could play with all this myself through the software as you suggested, but since an accountant did this it's not as easy. Or in your experience, are accountants able to / helpful in running hypothetical scenarios as well?

michaelthef · Post by **michaelthef** » Wed Apr 29, 2015 5:42 pm

With respect to your comment on not collapsing RRSP at once - so for my larger RRSP, if I convert it to a RIF, can I start taking it out right away 10% a year? No need to wait until a certain age?

So if I think about the benefits of the RIF - 15% tax withheld by Canada. Then when reporting on US returns, all the RIF is pension income on 16a right? Nothing needs to be to split between pension in 16a and then taxable amount in 16b? If not a RIF, then I know I've read you mention that the taxable gain part is the part that appreciated following arrival in US. So in the RIF scenario would I just have the income in 16a and then take the 15% tax amount as the FTC?

Do you think that the RIF strategy would avoid AMT resulting from the distributions?

Separate but related question how does one track the book value of the RRSP over time if taken out bit by bit? In particular, for the whole dynamic of having to split between 16a and 16b? Understand this question may not be relevant for the RIF strategy we are discussing, but rather for the one where one takes out manually every year.

Also, I may be failing to understand why taking out bit by bit helps reduce taxes / reduce potential AMT impact.

Finding that to make economic decisions based on understanding the taxation is quite harder - harder than just figuring out how to report after-the-fact. Perhaps an obvious observation.

michaelthef · Post by **michaelthef** » Wed Apr 29, 2015 5:52 pm

For the benefit of others, am including this other post that I found in the forum where nelsona references AMT issues associated with the FTC credit.

http://forums.serbinski.com/viewtopic.p ... hlight=amt

michaelthef · Post by **michaelthef** » Thu Apr 30, 2015 9:41 am

Have been reading about RRIFs but have not been able to understand the benefits of converting to a RRIF for someone in their 30s.

Seems like its unique to being a US resident right? Meaning can get 15% withholding and withdraw the RRIF in total over say the next 5 years. Then it minimizes the need to rely on the foreign tax credit since it's at 15% instead of 25% (and resulting AMT issue) and instead can just count most of it as regular income on 1040.

Am I thinking about this right? Thanks!

nelsona · Post by **nelsona** » Thu Apr 30, 2015 9:51 am

Oh, so you are PAYING $4700 to have this done?! For personal taxes?! How many businesses do you own?

Log into taxact and run these for free. No way you should be paying $5K for
personal taxe prep.
One return when you first move should be enough. And from what you say, it looks like he is doing these wrong. Your package should have a form 6251 attached, look it over.

For example, I thought you said you used the Cdn tax as a deduction. Why would you have foreign tax credit too? You can't have both. and if you had no income on 16b (you said her RRSP has aloss), then the FTC would have to be zero anyways!

An RRSP and RRIF are exactly the same in the eyes of IRS. The taxable portion of an RRIF withdrawal is exactly the same as if it were still an RRSP. Where did you get this idea that it wasn't? 16b will be always need to be calculated for a RRIF, in the manner that I've outlined countless times. There is only one BOOK value you need: the day you became a US taxpayer. After that FMV is sufficient.

All that changes when you convert to RRIF, is how CRA withholds against it, which is 15% instead of 25%, on yearly withdrawls totalling less than 10% of its value.

nelsona · Post by **nelsona** » Thu Apr 30, 2015 10:21 am

And just so we are clear, a LIRA (or LIF) is ALL taxable inUS. ie. 16b = 16a

michaelthef · Post by **michaelthef** » Thu Apr 30, 2015 10:21 am

I made the mistake of using the terms credit and deduction interchangeably - clearly not a smart thing to do when asking advice on this forum. I should be precise going forward. Let me rephrase.

The 25% withheld is being used as a credit, not a deduction. 16b is empty because there would have been a loss from FX (that RRSP has been held all in cash since moving to US).

There is a form 6251 - will look through it and see what impact would have been without the RRSP distribution.

With respect to the tax prep fees. I admit I find the costs quite high. I told myself I would try to do on my own this year but was not able to due to time constraints. The tax prep fees last year were for the following:

US Federal and state (2 states) for myself and spouse
Canadian filings for myself and spouse
Filing Form 3520 and creating a EIN for a TFSA (has since been closed)
2 Form 5471s for 2 Canadian controlled corporations
Extension Fee to extend to October

Interested to hear from you and others if the 4700 number seems at least reasonable/palatable for the above. Open to suggestions on positive experiences anyone has had with cross border accountants - though I think going forward a regular US based one should do as I continue to endeavor to simplify things.

nelsona · Post by **nelsona** » Thu Apr 30, 2015 10:22 am

I though you moved in 2013? Why would you say tha tyou wife sold her RRSP before moving, and she is reporting it in 2014?

michaelthef · Post by **michaelthef** » Thu Apr 30, 2015 10:26 am

Sorry what I said is wrong - on my return 16b is shown as the 15k number for the distribution of the RRSP. 16a is empty. Does this make sense?

Apologies for the confusion...

Also thanks for the note on the LIRA - yes she has a LIRA as well at the moment.

nelsona · Post by **nelsona** » Thu Apr 30, 2015 10:27 am

You know, you kind of left some pretty important information out here. You obviouly have avery complex tax situation and RRSP is the least of your problems.

You should also know that now that you are in US, you no longer have a "CCPC", since you are no loger Cdn resident.

Should part of the fee be going to the corp expenses?

michaelthef · Post by **michaelthef** » Thu Apr 30, 2015 10:27 am

Moved in 2013. But took distribution of wife's RRSP in 2014.

Sorry - I feel like I've created some confusion with the various posts (head has been swirling as I try to decipher all this).

nelsona · Post by **nelsona** » Thu Apr 30, 2015 10:28 am

Your AMT is likley coming from these other sources. As is your foreign tax credit.
I'm afrais I'm going to have to end this here. I don't need to give you anything more for free.