1040NR Exemptions

[sjantzi]

When completing a 1040NR and using a pro forma 1040 to calculate your effective tax rate (total tax / adjusted gross income), on the 1040NR do you use this effective tax rate adjusted gross income (line 36) or taxable income (line 41).

If its adjusted gross income is there any point to claiming any exemptions?

[colinc]

As per the 1040 instructions for tax (line 42)

http://www.irs.gov/pub/irs-pdf/i1040nr.pdf

Individuals. If your taxable income
(line 41) is less than $100,000, you
must use the Tax Table, later in the
instructions, to figure your tax. Be sure
you use the correct column. If you
checked filing status box 3, 4, or 5,
you must use the Married filing
separately column. If your taxable
income is $100,000 or more, use the
Tax Computation Worksheet after the
Tax Table.
However, do not use the Tax
Table, Tax Computation Worksheet,
or Tax Rate Schedules to figure your
tax if any of the following applies.
You are required to figure your tax
using Form 8615, the Schedule D Tax
Worksheet, or the Qualified Dividends
and Capital Gain Tax Worksheet,
You use Schedule J (Form 1040)
(for farming or fishing income) to
figure your tax.

---

Is there a scenario where you would use line 36 for calculation of tax?

[sjantzi]

When claiming a treaty position (non-discrimination Article XXV).

I'm basing this off another post I found:

>>>Also, spocket, if you don't mind, did you use calc. the effective rate using your taxable income (after deductions and exemptions)?

For the "effective rate", I did not use the "taxable income". I computed from my 'pro forma' 1040EZ as follows:

- eff tax rate = TAX [line 11] / Adjusted Gross Income [line 4] = 15.12% in my case

I used 'turbo tax' online to make this pro-forma, and in the report it generates, was a value computed for 'effective tax rate' that matched exactly the result above. Therefore I think my approach was OK.

Then I went back in my 1040NR using my sole income, and using the Tax table, and using the same formula above (line 58/line 35) it yielded an effective tax rate of 17.87%.

I understand this is where you invoke the article XXV(4) and replace the "TAX" amount in line 58 of the 1040NR by the tax rate computed in 'pro forma' times your 'adjusted gross income'.

[colinc]

okay I think I misunderstood your question.

You wanted to calculate your effective tax rate and not your taxes.

Isn't the calculation for effective tax rate dependent on what you want to measure? I mean you could calculate with Gross income, Adjusted gross income or Taxable income.
I think this kind of number is for your own amusement.

When it comes to being taxed of course exemptions count.

[nelsona]

According to the treaty, it is really taxable income that counts,

So, I would use (Form 1040, line 44)/(Form 1040, line 43) to come up with my rate.

I would then go to Form 1040NR, line 42, and set it to:
1040NR line 41 * my rate calculated above.

I would then proceed down the rest of 1040NR.

The reason I think this is best is that this allows for NEC income tax to be correctly assesed (explained in the tech document on the treaty) and also allows for SE tax to be collected properly for contractors, which is not income tax.

It probably works out better than the effective method procket used in the long run.

NOTE: remeber, that when doing the pro-forma, you cannot use the standard deduction, you must itemize on a schedule A, and you cannot use form 1116, but you can use all Cdn taxes paid in the year, and not refunded, on your Schedule A, which will lower your taxable income.

[sjantzi]

Thank you for the reply nelsona.

Do you think they would have an issue with a 1040NR calculated the way spocket did it?

[nelsona]

Why don't you do it the way I said, and see which one is better?

If you have you have any US income that is not wages, you can't use sprockets way.

[sjantzi]

I only have US wages.

I ask cause it ends up about $1000 less owing using sprockets way.

[nelsona]

and if you are eligible for the child tax credit, for example, the correct way is actually better.

[sjantzi]

BTW, when I did it sprockets way I used a 1040 not 1040EZ

I only have US wages.

I ask cause it ends up about $1000 less owing using sprockets way

[nelsona]

Could I ask why. What items do you have after line 40 on 1040 that you don't have on 1040NR? Remember, yo uare using 1116.

[nelsona]

,,NOT using 1116

[nelsona]

I don't thinkyou can figure a taxrate on 104 without counting exemptions and deductions, and then use that rate on athe income you find on 1040NR after you take exemptions and deductions.

You need to do both the same way, either tax agi or tax taxable income. Since the treaty and the tech explanation say taxable income....

[sjantzi]

[quote="nelsona"]Could I ask why. What items do you have after line 40 on 1040 that you don't have on 1040NR? Remember, yo uare using 1116.[/quote]

On the 1040, I have $37,424 in exemptions and itemized deductions.

Total Tax / AGI = 8%
Total Tax / Taxable Income = 12%

My Taxable Income on 1040NR is about $10,000 higher due to less itemized deductions (mainly mortgage interest)

It seems to me the best way is the correct way you mentioned (using taxable income). It ends up $970 more tax but is just reducing my Canadian tax so not a big deal.

You mentioned "cannot use form 1116, but you can use all Cdn taxes paid in the year"

Does this mean I can use the tax I owe canada for 2013? Is that only for the pro-forma NOT the 1040NR?

[nelsona]

Since you are only reporting US income on 1040NR, you cannot claim foreign tax credit, as this requires foreign income first, which you do not have.

Also, how is your income less on 1040NR than on 1040, since it must include all your income, including spouse. The income on 1040NR cannot be higher than 1040. 1040NR still has exemption for spouse and you.

I don't think you are doing either the pro forma or the 1040NR correctly.