Foreign Income Exclusion in the year that you move

[rsargant]

I am sorry if this question has been asked before.
We have lived in Canada our entire lives, before moving to the U.S in February '05.
I understand we have a choice of either filing a dual status return, or a regular "full year" return. That appeals to me for its simplicity as well as using the standard deduction.

After making this choice, I understand you must report worldwide income to the U.S. So, that would mean reporting Canadian income. My question is, can you then use Form 2555 to exclude your Candian income from U.S taxation. Or, must you report the Canadian income and then attempt to use foreign tax credits.

I'm asking this because we did not really earn enough in Canada prior to moving to owe any significant Canadian income tax ( so no tax credits to be found). But, adding that income to our U.S return income is quite expensive tax wise due to our bracket.

So, must I then go with a dual status return (thereby losing the standard deduction), or is using Form 2555 an option. I'm really confused by using it this way, since it really seems like it is for U.S Citizens and Permanent Residents living in another country.

[nelsona]

There is a quite lengthy thread on using 2555 in the first year: the answer is yes, but if IRS questions it it is a very complex treaty explanation to use it. The search in this system doens'nt work as well ats it used to, but look for Germany or rhollan. Remeber that 2555 is only for wages.

Just a quick note about your Cdn taxs though. Since you are departing Cdn resident, you will get only a pro-rated personal ammount, so do not assume that you will not have any tax. If you made more than $1200, you will have tax (not $8000 like most residents) unless you have other deductions. And you masy have deemed dispositions to deal with too.

But you are correct that the tax credit method, even if it the tax e high in Canada, would not be fully used in US, and you would owe more tax.