Correct calculation of effective US tax rate on 1116 vs T1

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nohairleft
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Joined: Tue Mar 04, 2014 12:16 am

Correct calculation of effective US tax rate on 1116 vs T1

Post by nohairleft »

Hi all,

I've been working through the last steps of my dual filings as a USC resident in Canada.

When calculating the effective tax rates on both sides of the returns manually, I notice that I am coming up with a different rate than what form 1116 seems to provide.

Based on past posts here, I had thought that the US effective tax rate was generally the 1040 total tax (line 44) over the AGI (line 37). I need this rate for the purpose of calculating the T1 line 232 deduction for my US-source bank interest and (potentially) any excess-of-15% tax on US-source dividends.

(And, for reference for others, I have the Canadian effective tax rate down as the total allowable taxes divided by the total income on line 150, where "total allowable taxes" is federal schedule 1 line 429 less the quebec abatement and the quebec prescription premium, plus quebec taxes paid on TP-1.D-V line 450. But this post doesn't concern that.)

After deciphering the form 1116 calculations, the effective US tax rate computed via that form works out to:

Total_Tax_line_44 / AGI_less_itemized_deductions_line_41 * (1 - Standard_Deduction_line_30/Gross_Income_from_all_sources)

I couldn't find a specific 1040 line number for the last item (Gross_Income_from_all_sources) and the 1116 instructions are rather unhelpful in that regard, but if I trust TurboTax, this number seems to be roughly derived as the sum of all of the positive numbers on the "Income" section on the 1040, plus the total capital gains from schedule D.

I imagine that, from the IRS's point of view, the USA effective tax rate calculation is exactly what it is above on form 1116. So shouldn't I be using that same effective tax rate when figuring my Canadian line 232 deductions too?

This question feels important because I am taking a deduction on T1 line 232 for the US tax paid on interest income. However, as a USC in Canada, I also get to re-source the remaining interest income on my 1116 to avoid being double-taxed. I'm trying to follow the calculation examples in canatech.pdf but it seems like I need to be using a consistent effective tax rate on both sides to make everything work out.

The form 1116 effectively prescribes how to calculate that effective tax rate, so don't I need to use that same rate for Canadian purposes too (meaning that my "line 44/line 37" calculation is wrong)?


While I'm asking questions...I also have under $10k of wage income from US sources. As explained last year, this remains US-sourced since the under-10k treaty provision doesn't apply to USCs, and Canada won't give me a FTC for it because it would have been Canada-sourced for a non-USC. This leaves me needing to re-source it on the US side, which is not a problem.

But I will also have to pay a smaller still amount of state income tax on this wage income (to California). Since states aren't a party to the tax treaty, I imagine that I can get a FTC on this state tax from Canada, right? Do I file this on the same T2209 that I use for my US passive interest income, or do I fill out a separate T2209 for "USA / California"?
nelsona
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Post by nelsona »

Form 1116 comes up with the credit. While it is approx the effective rate, it is not strictly this. Don't worry about the 1116 software. and don't use what comes out of the 1116 to decide the effective rate.

AGI IS gross income from all sources. Don't confuse gross income with things like gross pension income, etc.

For canada, use AGI vs tax. The tax is NOT line 44 for canadian purposes, it is everything from line 44 to 73, except for your withheld taxes and foreign tax credit (since you determine this before doing any FTC). You need to reduce the tax by all the credits you get, and add any of the extra taxes included on those lines.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
nohairleft
Posts: 32
Joined: Tue Mar 04, 2014 12:16 am

Post by nohairleft »

Thanks for the tips about the 1116 calculation. One note:

"AGI IS gross income from all sources."

I notice that TurboTax's calculation of "Gross income from all sources" on the 1116 is different from, say, my official AGI on line 37. For example, I had a bunch of capital gains which I wrote off against some capital loss carryforwards. This was sufficient to make the CGs all vanish (and then I wasted a further $3k of carryforwards as a mandatory deduction against ordinary income :-/ ).

However, for the 1116, TurboTax appears to be including all of the raw capital gains in the "gross income from all sources" calculation without taking the loss carryforwards into account. (I had no capital losses in the current year.) Is TT doing it wrong?

The official AGI line 37 also doesn't include my FEIE amount--I thought that was required to be included in this 1116 line too.

And do you have any ideas about where to report the FTC for the above California wages?

Thank you again!
nelsona
Posts: 18314
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

Since FEIE is excluded from FTC that would still be the case: AGI vs the tax, as I described above.

The 1116 calcs are correct.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
nohairleft
Posts: 32
Joined: Tue Mar 04, 2014 12:16 am

Post by nohairleft »

Thanks again for the responses!

Thinking through the 1116 re-sourcing calculation more: this is interesting, but it feels like I'm using double-dipping if I use a different effective rate than in the 1116.

Suppose that I have $100 of US-source interest income, which attracts $16 of USA taxes @ 16% (to make it slightly interesting), and $20 of Canadian taxes @ 20%, both rates determined using the "standard" formulas.

In Canada, I can deduct only up to 15% of the US tax, or $15. (At first I thought I could deduct all US tax from Canada because it's interest and not dividends, but canatech says: "Canada shall allow a deduction from (credit against) Canadian tax for U.S. tax paid or accrued with respect to the dividends, interest, royalties, but such credit need not exceed 15 percent of the gross amount of such items income that have been included in computed income for Canadian tax purposes.")

So I calculate my effective Canadian tax on $100-15 (and not -16) = $85 of income, giving revised Canada tax of $17. We are now done with Canada, so when all is done, the US tax must not exceed $20-17 = $3 to avoid double-taxation.

This means I need to eliminate $16 - 3 = $13 of US tax with XXIV(6). 13 / 0.16 = $81.25 and that income gets re-sourced to Canada.

This is all great, but if I go and plug $81.25 of income into my re-sourced 1116, the tax credit that pops out is more than $13 because it uses a different calculation for the effective tax rate. Isn't this kinda double-dipping if I don't use the 1116 effective rate for that last calculation, since I otherwise get more tax credit than I am supposed to?
nelsona
Posts: 18314
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

This is already covered no wheel reinventing needed.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
nohairleft
Posts: 32
Joined: Tue Mar 04, 2014 12:16 am

Post by nohairleft »

Nelsona, aren't you supposed to be on vacation?! :-)

The biggest problem was that I hadn't figured the 1116 correctly. In particular, I had a $3,000 capital loss carryover. I didn't realize (until after I analyzed the formulas used by the 1116) that this $3,000 was the equivalent of a not-definitely-related deduction and needed to be entered as such. This got my numbers much closer to where they should have been, although still not 100% equivalent to the effective-tax percentage.

As for the reconcilliation-between-1116-credit-amounts-and-effective-tax-rate issue being covered, I should add that I spent a number of evenings searching (here and elsewhere) and found no references on how to reconcile the 1116 output with the effective tax rate calculations.

If you are not actually hibernating and you have any pointers to other forum posts (or even just search keywords, beyond the obvious), they would be greatly appreciated!
nelsona
Posts: 18314
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

Can we drop this, please? You have my best answer; you are wasting a LOT of time on this, Your type of over-persistence on small matter is why I drop this site near tax time.

Seriously. Hire yourself a 150$/hr accountant to chat with. There is absolutely NOTHING unusual about you scenario, and is EASILY handled by software.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
nohairleft
Posts: 32
Joined: Tue Mar 04, 2014 12:16 am

Post by nohairleft »

Sorry! Thanks for all of your help.
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