I discovered this forum last night, and have been checking out Q and As concerning Form 8891 since then. I wish I had stumbled upon this forum a few years ago, as there is some good information here.
Nelsona, here's a question that I don't think anyone has asked yet (and if that's not the case, then I humbly apologize): what is your take on the tax consequences of electing to defer taxation on Form 8891?
Here's what I mean: you know as well as anyone that if you choose to make the election to defer on 8891, very little information needs to be reported to the IRS (all they want is plan balance at the end of the year--which is strange, since you'd think that they would at least want to know your -contributions- to the plan during the year as well!). However, if you DO NOT DEFER taxation, then you need to report annual contributions, plus the break-down of interest income, dividends, capital gains, etc. There is much more work to be done if you do not defer taxation on your RRSP on Form 8891.
HOWEVER, it seems to be the case that if you choose to DEFER TAXATION, when you finally do receive distributions from your RRSP, the IRS is treating those taxable distributions as being fully taxable. All of a sudden, they aren't treating your taxable income as the capital gains/interest/dividends/etc that they may be. So technically, you may end up paying more to the IRS in tax than you would if you chose NOT to defer on form 8891.
So Nelsona, what do you think of this fact? Has the IRS provided any further guidance on this tax uncertainty? Also, do you see a distinct advantage of NOT deferring taxation on form 8891, or do you, overall, still feel that deferring taxation, regardless of the end result (of possibly paying more in taxes due to your capital gains/dividends/etc not retaining their character because of the choice to defer) is still best, considering the yearly tax-work involved if you don't defer?
I hope that makes sense. I have about four RRSPs that were new for 2007 and will need to be reported to the IRS. I am trying to decide whether it's worth the added work to NOT defer (and then figure out all the capital gains and dividend stuff), or just take the easy-route and defer taxes.
(One more thing: I've read in at least one other post your take on what exchange rate to use. If I go the "easy" route and defer taxes on 8891 for each of the four RRSPs, I just need the plan balance at the end of the year for each fund. Should I just use Dec 31, 2008's exchange rate for that, or use the average rate for 2007? I think you're answer would be use Dec 31, but I wanted to make sure you still feel that way...)
Thanks!
Tax consequences of DEFERRING taxation on form 8891
Moderator: Mark T Serbinski CA CPA
There is no uncertainty: ONLY any income that you defer thru will be taxed as ordinary income, not cap gains. It will be reported on line 16b. Never is the entire distribution taxable.
You are correct that there is a chance that if your income was all pure cap gains, you might end up in the end paying less US tax that treating the growth as regular income.
As to whether this is sufficient to make one NOT elect to defer is NOT a difficult calculation. Remember that if you do not elect to defer, and pay tax year over year, you will still have the Cdn tax to deal with when you withdraw, and the cdn tax is almost ALWAYS more than the US tax, regardless if it is cap gains or ordinary income. and you are losing the advantage of time by not deferring.
And none of the US tax you would pay year over year would have any Cdn credit against it.
Another thing to remember is that if your RRSP is made up of mutual funds, the distributions that are called cap gains for Cdn purposes, are all treated as ordinary income for US purposes.
You are correct that there is a chance that if your income was all pure cap gains, you might end up in the end paying less US tax that treating the growth as regular income.
As to whether this is sufficient to make one NOT elect to defer is NOT a difficult calculation. Remember that if you do not elect to defer, and pay tax year over year, you will still have the Cdn tax to deal with when you withdraw, and the cdn tax is almost ALWAYS more than the US tax, regardless if it is cap gains or ordinary income. and you are losing the advantage of time by not deferring.
And none of the US tax you would pay year over year would have any Cdn credit against it.
Another thing to remember is that if your RRSP is made up of mutual funds, the distributions that are called cap gains for Cdn purposes, are all treated as ordinary income for US purposes.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
Any ideas as to why the IRS doesn't want you to fill in line 9 (Contributions to plan during the year) when you choose to defer (i.e. only required to answer lines 1 through 8)?
You'd think they would like to know what your annual (tax free) contributions are to the RRSP. So that when it comes time to take funds out of the RRSP (and you need to report distributions and taxable distributions), the IRS would have a record of what your yearly contributions were to the plan.
You'd think they would like to know what your annual (tax free) contributions are to the RRSP. So that when it comes time to take funds out of the RRSP (and you need to report distributions and taxable distributions), the IRS would have a record of what your yearly contributions were to the plan.
The IRS had a lot of problems coming up with this form. Why the year-end value is required is a puzzlement, too.
Just don't think too much about it.
Just don't think too much about it.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
Yeah--the IRS sure seems to have some incompetent boobs working for them. They had a long time to work on this form, and though it's much better than the alternative, it's still weak in areas. (Beneficiary/Annuitant confusion, anyone? Heh.)
Rant: I love also how I would call their "international number" for help (a call that *I* have to pay for, by the way, which isn't right. They're the ones requiring U.S. citizens living abroad to report and pay taxes; the least they can do is supply a 1-800 number), wait for 20 minutes on hold for the next available agent, finally get someone, ask them my question (that should be simple enough for them to answer) concerning Form 8891 (or any other Canada/U.S. tax matter), and all they can tell me is that "I should consult a tax professional."
End rant.
Thanks again for the info!
Rant: I love also how I would call their "international number" for help (a call that *I* have to pay for, by the way, which isn't right. They're the ones requiring U.S. citizens living abroad to report and pay taxes; the least they can do is supply a 1-800 number), wait for 20 minutes on hold for the next available agent, finally get someone, ask them my question (that should be simple enough for them to answer) concerning Form 8891 (or any other Canada/U.S. tax matter), and all they can tell me is that "I should consult a tax professional."
End rant.
Thanks again for the info!