Husband cashed out Canadian Penison

Kiki2466 · Post by **Kiki2466** » Mon Jan 26, 2009 10:06 am

My husband worked for Canda Post for several years and this past year he cashed out his pension. He was taxed 25% by Canada.

When filing our taxes this year (married/joint) where do we claim this money?
Do we have to claimm this money???
Is there a way to exempt this money (and if so, which form) because the taxes have been aid to CANADA

If we can, in fact, exempt this money, but still have to claim it.....will it count towards our total income for the year (and therefore losing us the EIC?)

thank you very much.

nelsona · Post by **nelsona** » Mon Jan 26, 2009 10:21 am

Was this a "pension" or was it an LIRA?

If it was a pension, Then entire pension is reported on line 15a and 15b on your 1040. It is all taxable in US, and unless it was very little, will eliminate the EIC which is for very low wage-earners.

You then use the 25% Cdn tax as a foreign tax credit on Form 1116. It is a "general limitation income". Use tax software to determine how much of the Cdn tax is credited to you. It will not be the entire 25%. More like 5%.

So you will end up paying quite a hefty price for this pension withdrawal: first the 25% tax to canada, then, likely another 10% to the IRS , plus whatever you pay to your state (its all taxable in your state if they have income tax), and the loss of EIC.

If you left it as a pension, and withdrew it at retirement slowly every year, you would only pay 15% Cdn tax (maybe less), almost nothing to IRS and state, and would have no impact on EIC or any other credit (since he would not be working).

But, on the other hand you do have the money in hand now (what;s left of it). How long before retirement was this lump sum taken?

Sorry you didn't come to this site earlier for advice. Was there a particular reason that the money was taken lump-sum instead of left it with the post office?

Kiki2466 · Post by **Kiki2466** » Mon Jan 26, 2009 1:11 pm

Thank you, this is quite depressing.
We were planning on using the money as part of a house downpayment...but now the Canadian dollar has tanked, so it still sits in his Canadian account....hoping to recoup some losses.
He is only 43, so it would have been a LONG time until retirement.

I wish we had come here first as well.!

Kiki2466 · Post by **Kiki2466** » Mon Jan 26, 2009 1:33 pm

One last thing....why would it not be the whole 25% I thought the treaty was about not being doubly taxed? thank you!!!!!!

Kiki2466 · Post by **Kiki2466** » Mon Jan 26, 2009 1:34 pm

I guess one last LAST thing, i spoke to someone at the IRS in the foreign income department and he said line 16a and B...was he incorrect?

nelsona · Post by **nelsona** » Mon Jan 26, 2009 2:07 pm

That is the way foreign tax credits work. Youcan only use the foreign tax to the extent that you owe tax in US, no more.

If it is pension income it is 15a and b. If it is a LIRA it is 16a and b. It doesn't much matter as the whole amount is going to go on a and b.

It goes to the different definitions of annuity and pension in the treaty and in IRS definitions.

If IRS telephlunkie said 16, so be it. They are wrong 80% of the time, but it doesn't matter in your case.

Kiki2466 · Post by **Kiki2466** » Mon Jan 26, 2009 3:11 pm

Thahk you very much....what you do here is really wonderful. I appreciate it.

KevMontana · Post by **KevMontana** » Sun Feb 08, 2009 12:44 pm

So I the husband had a 16000 lump CDN sum that I converted to USD. I then added this in turbotax on the form 1116.It showed up as pension line 1a. In part II I put the converted to USD taxes that I paid on line a category (r). To make it short and sweet I have to add $13,000 in income from CDN source to my US income and I got a $610 credit to put on my line 47of my form 1040? THAT is the tax treaty? This had the affect of adding a $1000 owing to my state tax of course..I am REALLY hoping I have done something wrong here cause 13000 added for a 610 deduction is a joke...As always appreciate the help..

Best,

Kev

nelsona · Post by **nelsona** » Sat Feb 14, 2009 4:49 pm

If you are in the 5% tax bracket, then that looks about right.

How much extra US tax are you paying. I;m betting its not that much more, than if you did not report the inocme at all.

nelsona · Post by **nelsona** » Sun Feb 15, 2009 4:33 pm

Just something I have not mentionned because I did not think it applied, but, if indeed your spouse's income is so low as to not be in a very high tax bracket in US, then he likely would be in a low tax bracket in canad too.

The CRA allows for pension type income, to allow non-residents to fiel a Cdn tax return 'as if' they lived in Canada. It called a section 217 election.

In essence, your husband would report all his Cdn income on a non-resident return, and then all his foreign income as well on a schedule. Depending on how his income was distributed, he could get much of his 25% tax withheld back from CRA. He gets to claim all the deductions he would normally be entitled to (personal amount, age, medical, etc)

Ufile.ca can do these returns quite well. From my previous calculations on these types of returns, if your husband income is less that $60K, he will get something back. If his income is less than $30K including his lump sum, he could very well get 10-15% back.

I guess, my original answer to your post should have started with "how much other money did he make in 2008?"

nelsona · Post by **nelsona** » Sun Feb 15, 2009 4:39 pm

... and individual states do not give any credit for foreign tax.

KevMontana · Post by **KevMontana** » Mon Feb 16, 2009 6:39 pm

Hi Nelsona...a wealth of information as always...Thank you. I made about 35K US and the pension was 16K CDN. Works out to about 48K in change USD.

This DID change my return a lot when adding the CDN income to the US tax return. My state tax owing ZOOMED to an extra $1000 owing form 110 to 1100 with the cdn income included...

Best,

Kev

nelsona · Post by **nelsona** » Tue Feb 17, 2009 6:45 am

As i said, state doesn't give credit.

s your effedctive IRS rate is small, like 5%, so the most you can get credited is about 5%.

At 60K Cdn, it is unlikely that a 217 election will get you anything back.

You could use the 6000 tax as a deduction rather than a credit on your return, that would definitely reduce your state tax.

KevMontana · Post by **KevMontana** » Tue Feb 17, 2009 10:14 am

Thank you for the quick reply as always....I only had 16K CDN so should I go ahead and use the 217 election?

You could use the 6000 tax as a deduction rather than a credit on your return, that would definitely reduce your state tax...

I am unclear on this...where did the $6000 number come from?

Thank you for your help as always...

Best,

kev

nelsona · Post by **nelsona** » Tue Feb 17, 2009 1:59 pm

217 means being taxed like ALL your income was from Canada -- with no foreign tax credit. And because more that 10% of your income was earned outside canada, your credits may be limited.

So the rate you will pay on that $16,000 will be pretty high. Run the numbers on ufile.ca and see what you get.

I guess I meant 4000: the NR tax. You can use this tax as a deduction on schedule A if you itemeize. Do it both ways and see.