We want to collapse our RRSPs, but are unsure if it makes sense to take them out all at once, or split the withdrawal between 2010 and 2011.
Some background:
We are Canadian citizens, US residents on work visas. We are domestic partners, but not legally married. We have two young children together (born in the US, and therefore dual citizens).
My info:
Work part time, with $45K salary.
My RRSP book value at time of our arrival in US (2007): ~US$115K
Current RRSP value: ~US$125K
Boyfriend/partner’s info:
Commission based, but roughly $80-90K annual income
RRSP book value at time of our arrival in US (2007): ~US$180K
Current RRSP value: ~US$200K
Other info:
Our major deductions include our two kids, daycare costs (approx $10K/yr), and mortgage. (We are getting rid of our house in early 2011, so no/minimal mortgage deduction in 2011.)
There is also a good chance that we will be relocating back to Canada towards the end of 2011 -- so we will be filing both US and Canadian taxes for 2011.
We met with a tax guy, and (without crunching numbers) he suggested taking RRSPs all in 2010 - citing unknown US income tax rates for 2011 and feeling that they will go up significantly.
He did not mention AMT, so I don’t know if that was considered at all or how to begin to even roughly calculate if that’s an issue. (Thank you nelsona for bringing that up in my other post.)
Any thoughts? Should we take all our RRPS out in 2010 or split the withdrawal over 2010/2011?
RRSPs - Collapse in 2010, or split between 2010/2011?
Moderator: Mark T Serbinski CA CPA
So, we are talking about $35K in US taxable income, and $80K in Cdn taxes.
Regardless of when you return to canada, as long as you collapse the RRSP before your return, you will only pay the 25% tax in canada, and pay US tax only on the growth, so your return to canada next year is not an issue (other than not splitting up the collapse over 3 years). Your 2011 Cdn tax return would only contain income from AFTER you arrive in canada.
Before accounting for foreign tax credit or deductions, this will add about $10K in US tax, (plus any state tax, you didn't say where you live).
The most that you would get credit for on the $80K is about $7K, so that is all the credit will save you. It would not matter which years you took it in.
if taxrates do go up, then so will your credit, so I wouldn't be putting much stock in what your "fair and unbiased" adviser told you
Putting aside AMT, if you were to be able to take a deduction for all the $80K in taxes, in your bracket, that would save you $20K. So it would appear that the deduction is better. as in the end it would actually get you $10K back on your over all tax, rather than costing you 3-4K using the credit.
However I can guarantee that putting an $80K deduction on your return in one year will trigger AMT. Once that happens, all bets are off as to how much of the deduction will actually benefit you.
The simplest thing to do would be to use last years tax software
(A) adding $35K to line 16b and $80K schedule A. See what that yeilds for tax and if that kicks you to AMT. If it does, then
(B) try $17K on 16b and $40K on schedule A. See how much extra tax is added in each case, if any.
then try
(C) adding $35K to line 16b and run a Form 1116 with the $80K Cdn tax (you must use software) to see how much tax is added. My guess is 3-4K.
Choose the tactic that yields least tax between A and C and TWICE B. Only if twice B is the lowest would you do the split.
Regardless of when you return to canada, as long as you collapse the RRSP before your return, you will only pay the 25% tax in canada, and pay US tax only on the growth, so your return to canada next year is not an issue (other than not splitting up the collapse over 3 years). Your 2011 Cdn tax return would only contain income from AFTER you arrive in canada.
Before accounting for foreign tax credit or deductions, this will add about $10K in US tax, (plus any state tax, you didn't say where you live).
The most that you would get credit for on the $80K is about $7K, so that is all the credit will save you. It would not matter which years you took it in.
if taxrates do go up, then so will your credit, so I wouldn't be putting much stock in what your "fair and unbiased" adviser told you
Putting aside AMT, if you were to be able to take a deduction for all the $80K in taxes, in your bracket, that would save you $20K. So it would appear that the deduction is better. as in the end it would actually get you $10K back on your over all tax, rather than costing you 3-4K using the credit.
However I can guarantee that putting an $80K deduction on your return in one year will trigger AMT. Once that happens, all bets are off as to how much of the deduction will actually benefit you.
The simplest thing to do would be to use last years tax software
(A) adding $35K to line 16b and $80K schedule A. See what that yeilds for tax and if that kicks you to AMT. If it does, then
(B) try $17K on 16b and $40K on schedule A. See how much extra tax is added in each case, if any.
then try
(C) adding $35K to line 16b and run a Form 1116 with the $80K Cdn tax (you must use software) to see how much tax is added. My guess is 3-4K.
Choose the tactic that yields least tax between A and C and TWICE B. Only if twice B is the lowest would you do the split.
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
The fact that you may be leaving in 2011, make it even more useful to avoid AMT, since you have no hope of recouping AMT in future years when you have fewer deductions.
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
Just one more thing that I didn't pick up one. Since you are not amrried, you are filing single tax returns, so you may have to change my numbers a bit, and each do a split.
My example was for a married couple.
My example was for a married couple.
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
[quote="nelsona"]Just one more thing that I didn't pick up one. Since you are not amrried, you are filing single tax returns, so you may have to change my numbers a bit, and each do a split.
My example was for a married couple.[/quote]
Yes, we've been filing single returns.
(And yes, I did follow that you gave examples for joint filing. I will crunch adjusted numbers. Thank you for the step-by-step instructions - very helpful.)
P.S. We live in Arizona.
My example was for a married couple.[/quote]
Yes, we've been filing single returns.
(And yes, I did follow that you gave examples for joint filing. I will crunch adjusted numbers. Thank you for the step-by-step instructions - very helpful.)
P.S. We live in Arizona.
I guess from an immigration point of view it was a little risky for you in US. If one of you lost their job, you would not get derivative status from the spouse.
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
-
springflower
- Posts: 15
- Joined: Sat Oct 30, 2010 8:49 pm
why $80K in Cdn taxes
I am doing some research about RRSP withdrawal and see this post. I have a quesiton.
"So, we are talking about $35K in US taxable income, and $80K in Cdn taxes". Why $80K in Cdn taxes? From their example, I think the taxable amount in Canada is $125k+$200K = $325K if they withdraw all their RRSP. I proabably miss something here. Can you explain?
Thanks,
springflower
"So, we are talking about $35K in US taxable income, and $80K in Cdn taxes". Why $80K in Cdn taxes? From their example, I think the taxable amount in Canada is $125k+$200K = $325K if they withdraw all their RRSP. I proabably miss something here. Can you explain?
Thanks,
springflower