Simplified AMT Foreign Tax Credit Election

Oliver · Post by **Oliver** » Wed Feb 03, 2010 12:45 am

After collapsing my wife's RRSP, I need to claim a modest FTC for 2009. On form 6251, what are the pros and cons, if any, of electing to use the Simplified AMT Foreign Tax Credit Limitation?

nelsona · Post by **nelsona** » Wed Feb 03, 2010 12:03 pm

None. Consider claiming the 25% as a deduction rather than a credit.

Oliver · Post by **Oliver** » Wed Feb 03, 2010 12:12 pm

Thanks for the prompt response. We are subject to AMT - so no deduction for us. Based on my first pass - we actually managed to suck up most of the credit.

nelsona · Post by **nelsona** » Wed Feb 03, 2010 1:52 pm

You should be reporting very little of the RRSP as income, so I somehow doubt that much of the 25% tax is deductible, if you are reporting the RRSP income correctly.

Oliver · Post by **Oliver** » Wed Feb 03, 2010 2:12 pm

The taxable portion is indeed only a small % of the total distribution. Let's say the taxble portion is $1000. $1000 goes in 7b on 8891 and also 16b on 1040. Then on 1116, I show the $1000 as foreign General Category Income and $250 as the foreign tax. Is this the right approach?

nelsona · Post by **nelsona** » Wed Feb 03, 2010 2:57 pm

Say the taxable portion is $1000 of a total $8000.
You would pay $2000 Cdn tax.

When you fill the 1116 (you are using software of course, do not try to do 1116 by hand) report $1000 of foreign income. You should put the entire Cdn tax as foreign tax paid. However, when the calcualtions are made, you will see that the credit is limited to roughly $100 depending on your effective overall taxrate. The rest will be carryfowrd, which likely doesn;t help you.

If your spouse is not working, have you looked at reducing her Cdn tax by filing a 217 return?

nelsona · Post by **nelsona** » Wed Feb 03, 2010 3:00 pm

Unless you reduce the Cdn tax by 217, your effectively are taking a HUGE tax hit on this RRSP pullout, since on top of the 25% tax, you are paying full US marginal rates on the taxable portion (minus a minimal ammount of credit) plus state tax.

Oliver · Post by **Oliver** » Wed Feb 03, 2010 3:52 pm

Thanks for the advice on the additional carryforward - not sure if I will ever be able to use it but you never know.

217 isn't an option for us.

The tax hit is not as significant as one might think. Firstly we collapsed the RRSP at the bottom of the market, which minimized the taxable gain (from a US perspective). Secondly, under the AMT, our effective tax rate, the 25% Canadian withholding, and our marginal tax rate are all much closer together than they would be under the regular tax code.