Tax Question on 2555 or 1116

baileybones · Post by **baileybones** » Mon Apr 21, 2008 11:10 am

I am a Canadian citizen and after spending 9 years in the U.S., I was transferred back to Canada in June 2006. I am or was a green card holder. I am currently working on completing my U.S. tax return for 2007 and have a question.

I am married filing joint with 2 children. I had no U.S. wages for 2007. Only Canadian wages, which I've entered on the 1040. To deduct the wages, I've tried both the 2555 and 1116. When I use the 2555, it says I have no tax to pay and I will get $600 in the Government rebate. When I use the 1116, it says I will get a refund of $373 (child tax credit), and $977 in the Government rebate.

My question is simple. Is it OK to just use the 1116? Is it my choice? Does the IRS care? It just seems too easy to get the bigger refund and I want to make sure I'm not missing anything here.

Thanks

nelsona · Post by **nelsona** » Mon Apr 21, 2008 11:49 am

More an more foreign (in the eyes of IRS) workers are using 1116 instead of 1116.

For one thing, you won't get the child credit if you 2555 (you should get it all with 1116), and also there wasa drastic change to 2555 last year that reduced its attractiveness. I trust you are using software to do this.

Those are the rules, and you are free to use them to your benefit.

One caution though is that once you switch from 2555 to 1116, you cannot switch back for some years (3-6, I'm not sure). This doesn't apply to you unless you used 2555 in 2006. besides, there is no rewason to use 2555 when living in canada.

nelsona · Post by **nelsona** » Mon Apr 21, 2008 11:50 am

That's "using 1116 instead of 2555"

JohnSt · Post by **JohnSt** » Mon Apr 21, 2008 2:01 pm

Nelson wrote, "besides, there is no reason to use 2555 when living in Canada."

Is this always true? Higher earners who max out their RRSP investments have in the past faced higher US tax, in part because of AMT thresholds. With some AMT relief (for this year only at this point), maybe that is a less of an issue, but I suspect there are still scenarios where 2555 is still the way to go.

nelsona · Post by **nelsona** » Mon Apr 21, 2008 4:11 pm

With the way 2555 is now calculated, and with the child tax credit, 1116 is now more favourable in almost all cases.

The only scenario I can think of that would favour 2555 is single, no kids, RRSPs and no investment income.

High income earners would still face higher taxrate in canada than in US.

expat1000 · Post by **expat1000** » Tue May 06, 2008 10:50 pm

In my situation, filing 2555 I will be receving a higher refund/rebate than filing 1116. (I made a couple of large charitable contrib., which practically brings my Canadian tax to zero). I have read here that filing 2555 is not the first choice, I am wondering why. I checked out the IRS website, and I could not see any downside in electing for 2555 (except that once you revoke your 2555 election- why would I do that---in order to elect again, you have to write to the IRS.

Thank you

nelsona · Post by **nelsona** » Sun May 11, 2008 9:01 pm

I have listed the downside: no child tax credit (if working in Canada).

I trust you are using software?

expat1000 · Post by **expat1000** » Tue May 13, 2008 7:10 am

Yes, I am using turbotax (but I know that you do not answer software related questions). When I figure out my tax using turbotax and the 2555 (not the 1116), the software shows that I am entitled to the child tax credit (refundable) and that I would be receiving $3000.00 (for 3 kids).
Thanks

nelsona · Post by **nelsona** » Tue May 13, 2008 8:02 am

Typically, your excluded wages don't count towrds the child credit eligibility. If you make more than the exclusion limit however (which is a lot easier now thatthe Cdn$ is at par) then I could see you still getting the credit.