FICA and State tax used for FTC?

Steve15 · Post by **Steve15** » Wed Apr 22, 2015 11:53 pm

US citizen and Canadian resident. Trying to figure out how to take FICA and state tax into FTC calculation on Canadian side.
Hereâ€™s an example from one of your previous posts: 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.

I completely get this part, but what if I have FICA of $250 and state tax of $500? What does the calculation look like then? Do I just add the $750 to the $400 and claim $1150, or do I need to add $750 to the total $1000 of initial US tax and prorate? If so it would then be $700 ($10K/$25K *$1750). Iâ€™m guessing it must be the latter? The state tax would include tax on the Canadian income, so I must have to prorate this portion.

That brings up a third possibility. Prorate the state tax and just add the FICA ($10K/$25K *$1500) = $600 plus $250 for FICA = $850.

So my question is do I use $1150, $700 or $850 on the Canadian side?

Would this work in reverse on the US side if I had Canadian wages with EI and CPP?

Any help with this would be greatly appreciated.

nelsona · Post by **nelsona** » Thu Apr 23, 2015 7:16 am

Why would your state tax return include anything other than US wages? You are not a resident of that state. So your state tax should only come from US income, and your fica is only from US income.

So you US tax eligible for Cdn credit, is the fed tax prorated for your wages, the state tax (prorated for your US wages, but there should be no need to prorate) and all the FICA.
EI and CPP are taxes against wages, so they would appear on the 1116 for your wages, assuming you did not exclude wages by 2555.

Steve15 · Post by **Steve15** » Thu Apr 23, 2015 8:44 am

Yeah I was thinking about the state taxes after I posted this and came to the same conclusion. I suppose it would be very rare that you have both US wages and Canadian wages on a state return.

What if you had a situation as follows, would you need to prorate state taxes in this case: Husband and wife with children, both Canadian citizens and residents. Husband moves to the US for work and wife and kids join him two months later. Departure date for both is date wife and kids joined him. Therefore, he is required to prorate W2 wages and include two months on Canadian departure return. For the two months he is in the US working before his family comes, does he report worldwide income on state return? If so, and he had other Canadian income, I suppose this would be a case where you would need to prorate state taxes?

What you are saying makes perfect sense. You only need to prorate if there is Canadian income involved. In this case the state taxes and FICA are directly related to US wages so you just add them on to the Fed tax prorated portion. So In my example the correct amount would be $1150 correct?

nelsona · Post by **nelsona** » Thu Apr 23, 2015 9:05 am

You can figure it out.
I've given you the principles.

Steve15 · Post by **Steve15** » Thu Apr 23, 2015 9:15 am

Thanks so much for your help!

Steve15 · Post by **Steve15** » Thu Apr 23, 2015 1:25 pm

One last question. Does it matter if some of the tax is not paid in the same calendar year? Can you still claim the portion that is paid in 2015 as a foreign tax credit for 2014? Letâ€™s use the example I provided earlier. If the prorated US tax that I come up with is $1000 on the 1040, but $750 of this was paid throughout 2014 as a source deduction and the other $250 is not paid until I complete and file my 2014 1040 in 2015 (likely becuase there was a shortfall in my source withholdings on the W2), can I still claim the full $1000 on the Canadian return in 2014? Or does the $250 have to be used on my 2015 Canadian return?

nelsona · Post by **nelsona** » Thu Apr 23, 2015 3:06 pm

CRA only accepts ACCRUED tax against the reported income (that is determined on your US tax return --not the paid tax).

Steve15 · Post by **Steve15** » Thu Apr 23, 2015 3:14 pm

Thank you so much, you have been tremendously helpful! I assume this is the same for the IRS? Thanks again.

nelsona · Post by **nelsona** » Thu Apr 23, 2015 3:19 pm

No, for th IRS you have a choice, if you sue 1116 to use the tax paid or accrued. If you use tax paid however, you cannot include any that is subsequently refunded, thus for those reporting foreign income year after year (like US citizens living in canada) the accrued tax methos is sufficient.

nelsona · Post by **nelsona** » Thu Apr 23, 2015 3:20 pm

If you choose to use Cdn tax as a deduction however on sched A, this can only be paid in that year and not subsequently refunded.

SM · Post by SM » Fri Apr 24, 2015 11:08 am

Thanks for all the info Nelsona, this is very much appreciated! However, Iâ€™m not sure if I follow. What exactly are you referring to with "subsequently refunded"? If your total tax paid throughout 2014 via source deductions is say $4000, but your total tax for 2014 is only $3000; is the subsequently refunded referring to the $1000 that you get back in April of 2015 as a refund when you file? Does that mean you canâ€™t claim the extra $1000 on the 1116 or Schedule A? In other words, on your 2014 1116 or schedule A you are limited to the actual tax of $3000; even know you paid $4000 in the calendar year? Which is essentially the accrual method.

If this is the case, the only time you could actually use the tax paid method for the 1116 or Schedule A is if you end up having to pay more than what you actually paid throughout the year. If 2014 source deductions are $4000 and total tax is $5000, you could claim $4000 in 2014 and claim the extra $1000 you pay in April of 2015 on your 2015 1040.

Sorry, just trying to wrap my head around this; this stuff is complicated lol

nelsona · Post by **nelsona** » Fri Apr 24, 2015 12:07 pm

I thought I made it pretty clear:
If in 2014 you paid $4000 (withheld or quarterly) and you determine yourtax woill only be $3000, you will get a $1000 refund. This $1000 cannot be used on your 1116, even if you use the PAID method, because it was refunded to you. same on schedule A if you use it as a deduction.

If instead of gettinga $1000 refund, you calculated your taxes were $5000, so you OWED $1000 at tax time, using the PAID method, youy could only claim $4000, both on 1116 or Schedule A. As you correctly concluded, the $1000 payment in spring 2015 could then be used on 1116 or schedule A on your 2015 return.

You may also use on schedule A (and to some extent 1116), the tax you owed from LAST year (paid in spring 2014) as a deduction, if you use the PAID method.
The paid method gets very complicated and is really best used when one doesn't have a foreign tax retunr to prepare.
Otherwise, the acrrual method is the best one for Cdn/US tax filers.

SM · Post by SM » Fri Apr 24, 2015 1:10 pm

Thanks so much for taking the time to "dumb" this down for me. I just wanted to make sure I understood this correctly. This is crystal clear now. You really are an invaluable resource for all of us. Have a fantastic weekend.

huangyuan521 · Post by **huangyuan521** » Mon Apr 27, 2015 4:01 am

If instead of gettinga $1000 refund, you calculated your taxes were $5000, so you OWED $1000 at tax time, using the PAID method, youy could only claim $4000, both on 1116 or Schedule A. As you correctly concluded, the $1000 payment in spring 2015 could then be used on 1116 or schedule A on your 2015 return.
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