US person in Canada, 14 years, never filed a US return

andsoitgoes · Post by **andsoitgoes** » Tue May 31, 2011 10:34 pm

Wait, I thought I needed the tax paid for the deductions....

nelsona · Post by **nelsona** » Wed Jun 01, 2011 9:46 am

When you have foreign income, you have the CHOICE between using the tax paid as a credit or a dedcution, but you can't count any tax that is refunded to you.

Besides, you shouldn't in most case use your foreign tax as a dedcution, as it is MUCH more valuable as a credit, in which case you still need the tax ACTUALLY paid, not that which has been refunded.

eortlund · Post by **eortlund** » Wed Jun 01, 2011 10:37 am

Isn't the total tax payable the same as the total tax paid? The CRA says you owe them something--then you generally have to pay more to them than was deducted from your paycheck, or they give you a refund.

jbryanvancouver · Post by **jbryanvancouver** » Wed Jun 01, 2011 10:49 am

I finally had to abandon Turbo Tax for Form 1116 and instead I did it by hand. TT is unable to correctly compute the adjustments on the deductions for mortgage interest and property tax in the presence of the 2555 exclusion (which I had to take, otherwise I have to pay AMT!).

I eventually discovered "Robert Smith" who lives and works in "Country X". He is the star of the "comprehensive example" in "Publication 514, Foreign Tax Credit for Individuals" which the IRS puts out. Robert is reasonably close to our situation (although not married with kids) and following his 1116 I was able to do mine. If you weren't already convinced that the US-Canadian tax treaty is incredibly baroque, sit down and have a perusal of Publication 514.

@andsoitgoes: if you are not taking the 2555 exclusion and not doing any deductions, then 1116 should be very simple. I know at least one other expat friend with children who does this and really does get money from the IRS every year for the child tax credit. (we are not eligible because our two salaries put us over the limit). So despite the pain, you will be happy to see it through. Good luck!

nelsona · Post by **nelsona** » Wed Jun 01, 2011 10:50 am

"Isn't the total tax payable the same as the total tax paid?"

There is a slight difference when it comes to "paid" and "payable", especially when using foreign tax as a deduction.

To illustrate, say you live in canada and have during the year $10K deducted from your wages. That is all the Cdn income tax your had withheld.

You do your taxes, and you
(a) figure your final tax is $12,000, and you send them a check for $2,000
(b) figure your final tax is $9,000, and you get a $1000 check from CRA.

If you were using your foreign taxes as a deduction, you could only claim for case:
(a) $10,000 since that is all you paid within the tax year. You could use the $2000 you sent by check only in the following tax year.
(b) $9,000 since, while you did pay $10,000 during the tax year, you had $1,000 refunded to you, even if that was after the end of the tax year.

The above illustrates, why, even if you use 1116, you should use the tax "accrued" method, instead of the tax "paid" method (remember the tick box on 1116?, that is what it is for).
The only time you should really use tax pid is when you are a non-resident subject to a flat, non-refundable tax. then paid and accrued are the same.

nelsona · Post by **nelsona** » Wed Jun 01, 2011 10:55 am

I agree with jbryan, that doing a mix between 1116 and 2555 on wages is not always well-handled in the software.

eortlund · Post by **eortlund** » Wed Jun 01, 2011 10:59 am

Thanks NelsonA--does that example still apply when you are taking the foreign taxes as a credit rather than a deduction?

I just checked my 1116 from last year--I did tick "paid" rather than "accrued." In our case, we always overpay, since I make contributions to a spousal RRSP and get the deduction from that only when I do our taxes.

I will make a note to use "accrued" from now on.

nelsona · Post by **nelsona** » Wed Jun 01, 2011 11:06 am

If you use 'paid', then you need to be sure that you NEVER have extra to pay at year end.

Use accrued.

jbryanvancouver · Post by **jbryanvancouver** » Wed Jun 01, 2011 11:15 am

Thanks for the paid/accrued distinction Nelsona. I had not appreciated that difference!

jbryanvancouver · Post by **jbryanvancouver** » Wed Jun 01, 2011 2:36 pm

Let me add one more question for the experts here. How does one decide where we need to pay the AMT? Are the criteria spelled out explicitly anywhere?

I used the IRS's AMT assistant which is a webform designed to tell you whether or not you need to do the AMT. Here is the website:

http://apps.irs.gov/app/amt2010/index.jsp?ck

I found that when I did not take the 2555 exclusion, I needed to pay AMT, but when I did take the exclusion, I did not have to do the AMT. *However*, there is one query on that page which does not make sense to me: they ask me to "Enter the tax refund amount(s) included in Form 1040, Line 21". For me that line is a negative number (-183000) coming from the foreign income exclusions of me and my wife from our 2555 forms. Am I suppose to include any of that in the query? I suppose not, but this was not clear to me.

Thanks.

jbryanvancouver · Post by **jbryanvancouver** » Wed Jun 01, 2011 2:37 pm

EDIT:

I meant to write

"How does one decide IF we need to pay the AMT"

andsoitgoes · Post by **andsoitgoes** » Mon Feb 27, 2012 11:58 pm

It's been a while and I'm sorry to bring this thread back, but I've finally gotten my daughter's SSN and have mostly recovered from surgery.

I am going back to 2006 to do my taxes. I took a few steps back and reviewed the information everyone has given me here.

In 2006 I earned $39,659 and paid $6,491 in taxes. I entered the income in the main W2 section, checked that the company was outside the US and checked that I earned the money while outside the US.

Then I proceeded through and was presented to fill in details about my 1116 form, which I filled out, entered tax amount paid and then had my information calculated, and this is where I'm confused.

My refund is showing up at $1,643. My child tax benefit has been reduced in the software to $357 and my foreign tax credit is showing at $3,114.

On the last screen all of this is presented and I'm then shown that I need to pay the AMT of $357.

I saw a comment about needing to pay the AMT, why? How can I fix that? Am I entering everything else in okay? If I submit it as such, will it be corrected when it gets to the IRS?

I'm so so so close to having this done, it's been a heck of a long and expensive process for me, I'd like to have it off my plate (as would my wife!!)

Thanks everyone.

Nick

andsoitgoes · Post by **andsoitgoes** » Tue Feb 28, 2012 12:02 am

Ah, okay then I'm not alone with the AMT situation. Jbry - did you ever get that figured out?

andsoitgoes · Post by **andsoitgoes** » Tue Feb 28, 2012 12:12 am

I apologize for having to keep posting this, sorry I didn't include this before, but as I mentioned in the above section my child tax credit was reduced to $357.

However I was then given an additional child tax credit $1,643 under "payments".

Wtf? Sorry, I will shut up now and stop posting.

nelsona · Post by **nelsona** » Tue Feb 28, 2012 11:09 am

That is exactly how it should work. The additial credit is paid to those who do not owe any real tax, like you.