I did a quick run of the numbers in TurboTax & it does appear that 1040NR is more beneficial for me this year than a pro forma 1040. My husband is taking a $14k deduction on his income for child care in Canada that would be considered taxable income in the US. Perhaps this could be part of it. Also, it doesn't look like I can get the child tax credit on the pro forma 1040.
Perhaps we really are in the unique situation where pro forma 1040 MFJ is not more beneficial than a straight 1040NR for me.
Can I file a 1040 MFS (haven't run the numbers yet, just curious) as a Canadian commuting or does this not abide by Article XXV?
Article XXV NOT be better than 1040NR?
Moderator: Mark T Serbinski CA CPA
You can file 1040 MFS, but this will have a higher taxrate than 1040 MFJ (closer to 1040NR), and you then have to abide by all the foreign tax and account reporting. Do NOT do this.
On your pro forma, are you including on your schedule A all the Cdn tax that you and your spouse actually paid (and will not be refunded) to CRA during 2013, including payments made at tax time last year. and the CPP and EI he paid during the year? That should make up for the child care difference. Are you using mortgage interest, property tax, etc. Are you deducting your husbands at-work RRSP contributions. The point of doing the pro forma is to use EVERYTHING that a US citizen living in Canada would use (except for form 2555 and 1116).
On your Cdn return, are you using up all the US tax that was calculated using straight 1040NR (before accounting for RRSP). I think you said you are not.
As to the additional child tax credit, it does indeed look like it is now limited for non-US citizen children who don't have an SSN.
On your child care issue. These Cdn-only credits or deductions (like child care and tuition) are of little value to cross-boder types like you, since they either come off AFTER applying foreign tax credit, or are applied at a lower taxrate. your situation even makes contrinbuting to 401(K) or RRSP almost worthless.
And as to why the pro froma maight not be working out for you is that your spouses income is ALL being added in the high tax bracket.
On your pro forma, are you including on your schedule A all the Cdn tax that you and your spouse actually paid (and will not be refunded) to CRA during 2013, including payments made at tax time last year. and the CPP and EI he paid during the year? That should make up for the child care difference. Are you using mortgage interest, property tax, etc. Are you deducting your husbands at-work RRSP contributions. The point of doing the pro forma is to use EVERYTHING that a US citizen living in Canada would use (except for form 2555 and 1116).
On your Cdn return, are you using up all the US tax that was calculated using straight 1040NR (before accounting for RRSP). I think you said you are not.
As to the additional child tax credit, it does indeed look like it is now limited for non-US citizen children who don't have an SSN.
On your child care issue. These Cdn-only credits or deductions (like child care and tuition) are of little value to cross-boder types like you, since they either come off AFTER applying foreign tax credit, or are applied at a lower taxrate. your situation even makes contrinbuting to 401(K) or RRSP almost worthless.
And as to why the pro froma maight not be working out for you is that your spouses income is ALL being added in the high tax bracket.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing 
For my husband's Canadian income & taxes paid, I put all his information into a mock W-2 in TurboTax so no, his taxes paid would not have appeared in schedule A (CPP & EI went into SS tax & medicare tax withheld boxes of mock W-2) . I did include the taxes he paid (subtracting the amount to be refunded), but again, I did this on his "W-2". He received a tax refund from CRA last year but I didn't include that anywhere.
Yes, I included mortgage interest & property taxes & deducted my husband's at-work RRSP contribution (through the "W-2") but I did not include any additional RRSP deductions he made (outside of his work plan). Clearly I'm not doing this exactly right. The issue seems to be in how I'm entering his income (& taxes paid). I guess I should not be using a mock W-2?
As to the child care deduction, you're absolutely right...it has no value to me but it certainly helps significantly on my husband's Canadian tax side.
WRT your comment that my situation even makes contributing to 401(k) or RRSP almost worthless, you are referring to if my foreign tax credit is too high (in this case, because I am filing 1040NR) correct? I would certainly agree there & it's too bad because well, I'd like to retire one day. :(
I used my gross adjusted income & my total tax (line 37 & line 61).
I'm unclear on why "And as to why the pro froma maight not be working out for you is that your spouses income is ALL being added in the high tax bracket". Our adjusted gross income on the pro forma MFJ is in the 28% bracket. his income does move us from the 25% to the 28% bracket but it still seems low enough for the pro forma to work. I need to recheck my methodology!
Yes, I included mortgage interest & property taxes & deducted my husband's at-work RRSP contribution (through the "W-2") but I did not include any additional RRSP deductions he made (outside of his work plan). Clearly I'm not doing this exactly right. The issue seems to be in how I'm entering his income (& taxes paid). I guess I should not be using a mock W-2?
As to the child care deduction, you're absolutely right...it has no value to me but it certainly helps significantly on my husband's Canadian tax side.
WRT your comment that my situation even makes contributing to 401(k) or RRSP almost worthless, you are referring to if my foreign tax credit is too high (in this case, because I am filing 1040NR) correct? I would certainly agree there & it's too bad because well, I'd like to retire one day. :(
I used my gross adjusted income & my total tax (line 37 & line 61).
I'm unclear on why "And as to why the pro froma maight not be working out for you is that your spouses income is ALL being added in the high tax bracket". Our adjusted gross income on the pro forma MFJ is in the 28% bracket. his income does move us from the 25% to the 28% bracket but it still seems low enough for the pro forma to work. I need to recheck my methodology!
You aren't handling his wages correctly on the pro forma. His taxes can't go on a fake w-2, they need to go on schedule A (which sould hurt), same for the CPP/EI, (that should help). for refund I'm more referring to what he will get back this year. And what you paid last april. The pro forma, even though it isn't the real return, has to be done properly.
The correct method of doing the taxrate is using the ratio of (line 44/line 43) of pro forma 1040 and multiplying it by line 41 of 1040NR. If that amount is less than what line 42 of 1040NR shows, you use that amount, if not, forget the pro forma. Then you complete the 1040NR as normal.
What I meant in your case of not benefitting from making RRSP or 401(k) contributions, is that any such contribution is lowering your taxable income in Canada, which hits you on the childcare tax credit, since you are trying to keep HIS income lower than yours. The only way this would work is if you were able to drastically lower your US taxrate, so that your foreign tax credit would leave you with a healthy Cdn tax bill, and then lower it with the childcare tax credit, but from what you are saying about your pro forma, that doesn't seem to be possible.
The correct method of doing the taxrate is using the ratio of (line 44/line 43) of pro forma 1040 and multiplying it by line 41 of 1040NR. If that amount is less than what line 42 of 1040NR shows, you use that amount, if not, forget the pro forma. Then you complete the 1040NR as normal.
What I meant in your case of not benefitting from making RRSP or 401(k) contributions, is that any such contribution is lowering your taxable income in Canada, which hits you on the childcare tax credit, since you are trying to keep HIS income lower than yours. The only way this would work is if you were able to drastically lower your US taxrate, so that your foreign tax credit would leave you with a healthy Cdn tax bill, and then lower it with the childcare tax credit, but from what you are saying about your pro forma, that doesn't seem to be possible.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
Thanks a lot for this nelson. I'll have another look tonight. A quick glance at including his taxes on Schedule A seemed to drop the tax rate down but not sure if it's enough yet.
I will deduct what he expects to get back this year from his taxes paid in Canada & put on schedule A & include CPP/EI. He received a return last April. Do I need to include that and / or just what I paid last April (in Canada) or expect to pay this year?
I will check those ratios. Thank you again. I'm hoping all this helps to allow me to use the pro forma after all.
I see your point about RRSP / 401k contribution. I try to keep a log throughout the year to make certain that his income stays lower & we generally manage to make certain that happens by increasing his RRSP contributions enough so that is the case. It seems unlikely I could ever really get my US rate down low enough to take the $14k child care deduction myself. Our incomes are very similar so it is a balancing act...another reason I should be taking care of this myself & not allowing a (shoddy) tax preparer to do it.
Thank you again for all your help. You're awesome!
I will deduct what he expects to get back this year from his taxes paid in Canada & put on schedule A & include CPP/EI. He received a return last April. Do I need to include that and / or just what I paid last April (in Canada) or expect to pay this year?
I will check those ratios. Thank you again. I'm hoping all this helps to allow me to use the pro forma after all.
I see your point about RRSP / 401k contribution. I try to keep a log throughout the year to make certain that his income stays lower & we generally manage to make certain that happens by increasing his RRSP contributions enough so that is the case. It seems unlikely I could ever really get my US rate down low enough to take the $14k child care deduction myself. Our incomes are very similar so it is a balancing act...another reason I should be taking care of this myself & not allowing a (shoddy) tax preparer to do it.
Thank you again for all your help. You're awesome!
I was fairly certain but she never did show me both methods so I can't be sure.
I did try running them both ways using the information I've learned here (sort of quickly mind you) & I came up with very similar tax rates using both the pro forma & 1040NR.
A friend of mine goes to the same tax office (different preparer) & he tells them every year that they can't use Article XXV because she (who works in Canada) makes too much money. Is this generally true? It doesn't seem to make sense to me as, because she earns a lot, she also pays a lot in taxes.
I did try running them both ways using the information I've learned here (sort of quickly mind you) & I came up with very similar tax rates using both the pro forma & 1040NR.
A friend of mine goes to the same tax office (different preparer) & he tells them every year that they can't use Article XXV because she (who works in Canada) makes too much money. Is this generally true? It doesn't seem to make sense to me as, because she earns a lot, she also pays a lot in taxes.
It's not a matter of a certain threshold for the Cdn-working spouse that "eliminates" the use of XXV. However it does come down to a numbers game. And if you throw AMT into the mix, it could very well be that if both in the couple are earning 6-figure salaries, the taxrate on the proforma becomes high, and the Cdn tax paid can't effectively be used as a deduction because of AMT.
Just like filing MFJ when living in US, the ideal situation is one of the couple working, the other not.
But, I think some of the very few preparers familiar with XXV still forget some of the deductions that you can put on the pro forma, like Cdn tax paid, real estate, mortgage, etc.
This is akin to the times -- albethey rare -- when a US couple are better off filing MFS instead of MFJ. These situations are becoming even rarer with AMT in the mix.
Two things i ALWAYS say with regards to XXV are:
A- you need to run it both ways whenever one's situiation changes to see the results, ince 1040 software is practically free, one can satisfy themselves even if they hire a pro later. once you are satisfied that it does or doesn't work. stick with it until situation changes, and
B- you don;t want to get carried away with lowering your US tax. All you want to do is lower it sufficiently that you end up using all of the US tax on your Cdn return, AFTER you have fully used the Cdn-only deductions (mainly RRSP) available to you.
Just like filing MFJ when living in US, the ideal situation is one of the couple working, the other not.
But, I think some of the very few preparers familiar with XXV still forget some of the deductions that you can put on the pro forma, like Cdn tax paid, real estate, mortgage, etc.
This is akin to the times -- albethey rare -- when a US couple are better off filing MFS instead of MFJ. These situations are becoming even rarer with AMT in the mix.
Two things i ALWAYS say with regards to XXV are:
A- you need to run it both ways whenever one's situiation changes to see the results, ince 1040 software is practically free, one can satisfy themselves even if they hire a pro later. once you are satisfied that it does or doesn't work. stick with it until situation changes, and
B- you don;t want to get carried away with lowering your US tax. All you want to do is lower it sufficiently that you end up using all of the US tax on your Cdn return, AFTER you have fully used the Cdn-only deductions (mainly RRSP) available to you.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
But just doing a quick calculation:
a married person earning US$100K of US taxable income, would pay 21.7 effective taxrate of US tax
If they as a couple had US$215K of worldwide TAXABLE income (and the proforma would have way more deductions before coming up with that figure), their taxrate on pro forma would still be less than 21.7%, and pro forma would benefit them.
So I don't buy the notion that just because the Cdn spouse makes a lot of money that pro forma won't work.
The US working spouse would have to be making a pretty low salary compared to the CDn spouse....
a married person earning US$100K of US taxable income, would pay 21.7 effective taxrate of US tax
If they as a couple had US$215K of worldwide TAXABLE income (and the proforma would have way more deductions before coming up with that figure), their taxrate on pro forma would still be less than 21.7%, and pro forma would benefit them.
So I don't buy the notion that just because the Cdn spouse makes a lot of money that pro forma won't work.
The US working spouse would have to be making a pretty low salary compared to the CDn spouse....
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
So, now lets use above example take 50K off the US workers salary. His 1040NR rate falls to 16.8%
Adding the $115K of Cdn income from the above example, and the pro forma taxrate on 165K is 20.4% and the pro forma is not beneficial.
So, obviously there is some sweet spot that needs to be looked at, but one cannot summarily dismiss pro forma without crunching the numbers at least one time, with all deductions etc.
Adding the $115K of Cdn income from the above example, and the pro forma taxrate on 165K is 20.4% and the pro forma is not beneficial.
So, obviously there is some sweet spot that needs to be looked at, but one cannot summarily dismiss pro forma without crunching the numbers at least one time, with all deductions etc.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing