Thanks in advance for your help with my admittedly basic question.
I am dual US and Can, resident in Canada. In 2013, I had US income (3rd party income replacement) with US federal tax withheld. I also had income in Canada from two employers with Can taxes withheld. Total income less than $25K.
Should I file my US or Can tax return first? I have filed both US and Can returns in the prior two tax years while Can resident, but only had US source income in those years so it seemed best then to file my US first and then claim the US taxes for credit on the Can return. But now with income from both US and Can in 2013, I am unclear on how to proceed.
Also, will I have to amend one return based on the outcome of the other? Determining my final tax liability for one return seems a little chicken and egg if I have a foreign tax credit of some kind for both Can and US.
Thanks again for any guidance.
Dual Can res with US and Can income—file US or Can first?
Moderator: Mark T Serbinski CA CPA
Claiming foreign tax credits (FTC) has nothing to do with the order in which you file. You need to prepare BOTH at the same time.
In fact, from what you say, you shouldn't need to use foreign tax credits on your US return at all, you simply exclude your Cdn wages by using form 2555, and that should be enough to make you non-tatxable on your 1040.
Although you owe no US federal income tax, you likely paid FICA on these wages, and state income tax. That would go on your Cdn return as a foreign tax credits.
But, let's say that your had income that could not be excluded and had some US income tax liability.
The way to proceed is to prepare both tax returns without considering foreign tax credits, or source of income. This gives you an average taxrate for all your income on both your Cdn and US returns. You would then divide your income into US and Cdn sources. The percentage of tax on each return would be equal to the proportion of US- and Cdn-sourced income. You would use the Cdn tax owed on the Cdn income on your 1040 (form(s) 1116), and you would use the US tax owed on your US income on the CDn federal and provincial foreign tax credit lines to reduce both taxes.
You stop there. You don't repeat this with the new reduced tax.
Quick example: You earn 10K in US and 15K in Canada. That is a 40/60 split. Your initial 1040 comes up with $1000 of tax, and your Cdn one comes up with $1500.
The Cdn tax eligible for credit on 1040 is $900 (60% of your total Cdn tax, on the 15K of Cdn income you reported). Plug those into your 1116 and you get a credit.
The US tax eligible on your CDn return is $400. You plug that and the $10K US income into the federal FTC, and if any is left over, into the provincial FTC, and that is the reduction on your Cdn tax.
Send in the returns, in any order.
In fact, from what you say, you shouldn't need to use foreign tax credits on your US return at all, you simply exclude your Cdn wages by using form 2555, and that should be enough to make you non-tatxable on your 1040.
Although you owe no US federal income tax, you likely paid FICA on these wages, and state income tax. That would go on your Cdn return as a foreign tax credits.
But, let's say that your had income that could not be excluded and had some US income tax liability.
The way to proceed is to prepare both tax returns without considering foreign tax credits, or source of income. This gives you an average taxrate for all your income on both your Cdn and US returns. You would then divide your income into US and Cdn sources. The percentage of tax on each return would be equal to the proportion of US- and Cdn-sourced income. You would use the Cdn tax owed on the Cdn income on your 1040 (form(s) 1116), and you would use the US tax owed on your US income on the CDn federal and provincial foreign tax credit lines to reduce both taxes.
You stop there. You don't repeat this with the new reduced tax.
Quick example: You earn 10K in US and 15K in Canada. That is a 40/60 split. Your initial 1040 comes up with $1000 of tax, and your Cdn one comes up with $1500.
The Cdn tax eligible for credit on 1040 is $900 (60% of your total Cdn tax, on the 15K of Cdn income you reported). Plug those into your 1116 and you get a credit.
The US tax eligible on your CDn return is $400. You plug that and the $10K US income into the federal FTC, and if any is left over, into the provincial FTC, and that is the reduction on your Cdn tax.
Send in the returns, in any order.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing 
Thank you.
Thanks for pointing me at the foreign income exclusion. It looks like my 11.5k in Can wages will be excluded on my US return and my US taxes will only be about $330.
However, I am confused about what I can and must do with my Can interest income. I have $676 in interest income from Can only. I have reported the income in the US return, but should I go through the procedure you outlined in order to get a small FTC using form 1116?
And - would it be okay if I did not do this and gave up that small credit on the US? I am a bit challenged working on the US in Turbo Tax (which hides the worksheets) and I cannot tell if it can deal with foreign interest that does not have foreign tax withheld and reported on a 1099INT. Also I am going to farm the Can return to a local tax preparer and they would like me to show up with my US taxes determined so they can plug in the Can FTC. I am not sure if I can determine my Can tax rate in advance of this.
I would like to do it correctly but I'm not sure I can get there.
Thanks for pointing me at the foreign income exclusion. It looks like my 11.5k in Can wages will be excluded on my US return and my US taxes will only be about $330.
However, I am confused about what I can and must do with my Can interest income. I have $676 in interest income from Can only. I have reported the income in the US return, but should I go through the procedure you outlined in order to get a small FTC using form 1116?
And - would it be okay if I did not do this and gave up that small credit on the US? I am a bit challenged working on the US in Turbo Tax (which hides the worksheets) and I cannot tell if it can deal with foreign interest that does not have foreign tax withheld and reported on a 1099INT. Also I am going to farm the Can return to a local tax preparer and they would like me to show up with my US taxes determined so they can plug in the Can FTC. I am not sure if I can determine my Can tax rate in advance of this.
I would like to do it correctly but I'm not sure I can get there.
I would claim the interest as foreign and the 1116 passive credit. The tax eligible has nothing to do with withholding. It is the proportion you paid in canada on that income. It may not be much but since you are being taxed in US, you might as well get credit for it.
You can't complete your US taxes until you have at least run through the Cdn tax return (before claiming any credits). Then you will know how much CRA taxed you on your Cdn income.
For your Cdn return, your initial calculation, without foreign tax credit, is what the Cdn preparer should use. So what you have now is good enough to complete your Cdn taxes, assuming that your only US income is that income replacement.
You can't complete your US taxes until you have at least run through the Cdn tax return (before claiming any credits). Then you will know how much CRA taxed you on your Cdn income.
For your Cdn return, your initial calculation, without foreign tax credit, is what the Cdn preparer should use. So what you have now is good enough to complete your Cdn taxes, assuming that your only US income is that income replacement.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
If they balk at using the numbers you have so far, then they don't know how to do the returns.
Principle: you always determine the foreign tax credits on each return without taking into consideration the foreign tax credits. You don't iterate back and forth.
Principle: you always determine the foreign tax credits on each return without taking into consideration the foreign tax credits. You don't iterate back and forth.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
some time later . . . I am about to file my US return and claim the foreign tax credit on my canadian earned interest. Thanks for the push to get it all.
The principle has finally sunk in. And I've learned the TurboTax mechanics (enter in the interest income and foreign taxes on that interest as if one had 1099 INTs and the software takes care of the Form 1116 in the background).
Last question: I have to have my canadian tax rate to calculate the foreign tax on the interest income. I have my canadian tax return summary (done without any foreign tax credit on US taxes for this purpose). Do I calculate my tax rate based on line 435 (total payable) which includes both net federal tax and provincial tax? total payable/taxable income Or would it just be the federal tax amount?
Thanks,
The principle has finally sunk in. And I've learned the TurboTax mechanics (enter in the interest income and foreign taxes on that interest as if one had 1099 INTs and the software takes care of the Form 1116 in the background).
Last question: I have to have my canadian tax rate to calculate the foreign tax on the interest income. I have my canadian tax return summary (done without any foreign tax credit on US taxes for this purpose). Do I calculate my tax rate based on line 435 (total payable) which includes both net federal tax and provincial tax? total payable/taxable income Or would it just be the federal tax amount?
Thanks,