Cashing out an RRSP, calculating the US tax liability.

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benryan10
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Joined: Sat Dec 20, 2014 8:06 pm

Cashing out an RRSP, calculating the US tax liability.

Post by benryan10 »

My soon to be ex. wife is considering cashing out her comparatively small RRSP account, (approx. $62k CAD / $54k USD), sometime early in 2015. We have been US resident for tax since 2001. (We filed in the US for the first time in 2000, but as non-resident aliens, since we moved from Canada to the US towards the end of the 2000).

At the end of 2000, she had her own RRSP account, plus a spousal RRSP account at Altamira, which in 2007 were combined and moved to an RRSP account at TD Waterhouse. In 2007, I wrote to Altamira to get a "book value" for Dec 31, 2000. which combined came to C$50,900 (= US$35,188 @ 1.4995 for Dec 29, 2000), which was more than portfolio at the time.

My understanding is if she cashes out her RRSP, she will be subject to a 25% non-resident withholding tax by Canada on the entire amount of C$62k.

What will her US tax liability be?

Assuming current values, would it be (US$54,000 - US$35,188) = US $18,812 would be declared as income? capital gains?

I understand that she will also be able to claim a foreign tax credit on her US return for the Canadian 25% withholding tax.

(I have discussed with her the alternative of leaving it for now, and converting to a RRIF at later date, and then withdrawing at the reduced 15% rate of withholding tax, but she does not want the hassle of dealing with it).
nelsona
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Joined: Wed Oct 27, 2004 2:33 pm
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Post by nelsona »

The gross amount of her withdrawal is pension income, reported on line 16a of 1040.

You are correct in how you determined the (net) taxable amount, which goes on line 16b.

The line 16b amount then goes on form 1116 (general limit income) and the entire 25% can be used towards calculating the credit. It will not be used up entirely.

She could convert to a RRIF now if she wishes, and begin taking out small amounts (10% a year) at the 15% rate.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
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