US Social Security income reporting on Form 1040

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Canadian Newbie
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US Social Security income reporting on Form 1040

Post by Canadian Newbie »

I searched the forum for the answer to this but could not find anything directly on point.

I am a US Citizen and lived for the full year of 2015 in Ontario.
I collected around 17,000 in Social Security benefits in 2015.
I realize the income will be taxed in Canada with some deduction for %15 and maybe a pension credit.

My only question is how is the social security income reported and taxed on the US 1040.?

Is the income included on line 20a, Social Security benefits, and then shown as zero taxable on line 20b?
Or do I include the taxable amount and then take the FTC on the canadian tax paid on a re-sourced 1116?

So it comes down to is the income somehow excluded or do you take a FTC?

Thanks to anyone who can assist.
nelsona
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Post by nelsona »

The absolute correct way is to re-source the income.

However, this issue affects seniors, and is typically the only treaty related issue they have ever encountered, IRS ALWAYS accepts the simple way of zero-ing out 20b. You can skip the 8833. IRS can figure it out. Make sure the SSA knows where you are.
When/if you ever begin to draw CPP, you will have to inform SSA, to have your SS docked because of WEP. there will be no WEP if you worked for 30 years in US.

In Canada, you report the entire amount, in C$, and take a deduction on 15% of it on 256. No foreign tax credit of course.
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nelsona
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Post by nelsona »

And, again, if you were to use the re-sourcing 1116 method, you are asking for credit based on the US tax calculated, not the Cdn tax. Even if you would owe nothing in Canada, the full amount of SS would be used on the 1116.
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Post by Canadian Newbie »

[quote="nelsona"]The absolute correct way is to re-source the income.

However, this issue affects seniors, and is typically the only treaty related issue they have ever encountered, IRS ALWAYS accepts the simple way of zero-ing out 20b. You can skip the 8833. IRS can figure it out. Make sure the SSA knows where you are.
When/if you ever begin to draw CPP, you will have to inform SSA, to have your SS docked because of WEP. there will be no WEP if you worked for 30 years in US.

In Canada, you report the entire amount, in C$, and take a deduction on 15% of it on 256. No foreign tax credit of course.[/quote]


That is what I thought...the correct way is thru the FTC and re-sourcing. There is no statutory exclusion so the FTC route makes sense. I guess the only effect by not excluding the income is other income on the 1040 gets pushed into higher marginal rates in the US. I would pay no US tax on the SS if I resource on form 1116 but my other income will get pushed into a higher bracket.
I might go for the simple way of zeroing out on line 20b to save a few bucks on the marginal rate bump.

Thanks again!
nelsona
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Post by nelsona »

Since you shouldn't owe any tax in US anymore, since you lived in Canada all year, I wouldn't worry about the tax rate.

What other income are you thinking will be taxed in US?
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Post by Canadian Newbie »

[quote="nelsona"]Since you shouldn't owe any tax in US anymore, since you lived in Canada all year, I wouldn't worry about the tax rate.

What other income are you thinking will be taxed in US?[/quote]

You are correct. I don't know why I thought about the marginal rate. My only other income is from a pension that will kick in this year. However, it will not come close to being taxed above 15% so I don' have to worry about resourcing on the US return for any double tax effect.

Also for 2015, I had wages in Canada around 50,000. It would seem to me that taking the FTC would be better due to the higher rates in Canada. I will have to look at what results in the lower tax. I need to read all of the tax topics on the exclusion as well since this is new territory for me.

I was wondering, can a taxpaper use the FTC in year one and then take the Foreign wage exclusion the next year and vice versa?

Thanks!
nelsona
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Post by nelsona »

Most US citizens living in Canada simply exclude their wages by form 2555. You qualify by the bone fide residence test. It is better than 1116 when you have mixed source income.
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Post by ND »

Parents of children under 17 needing earned income to claim $1,000 refundable add child tax credit would not claim exclusion if that lowers their earned income enough to reduce or eliminate said refund.

"I was wondering, can a taxpaper use the FTC in year one and then take the Foreign wage exclusion the next year"
Yes

"and vice versa"
can elect out of the exclusion but then cannot reverse that for 5 years. Interesting to note that if you later wanted to rescind that revocation, there is a basis for such in a FOIA letter that indicates that the return for the year of revocation can be amended provided the statute of limitations for that year has not run and in that case, a ruling is not required.
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Re:

Post by Canadian Newbie »

nelsona wrote:
> The absolute correct way is to re-source the income.
>
> However, this issue affects seniors, and is typically the only treaty
> related issue they have ever encountered, IRS ALWAYS accepts the simple way
> of zero-ing out 20b. You can skip the 8833. IRS can figure it out. Make
> sure the SSA knows where you are.
> When/if you ever begin to draw CPP, you will have to inform SSA, to have
> your SS docked because of WEP. there will be no WEP if you worked for 30
> years in US.
>
> In Canada, you report the entire amount, in C$, and take a deduction on 15%
> of it on 256. No foreign tax credit of course.

I hope I did not misunderstand your response.
I have been reporting my SS payments on my Form 1040. A small amount of the SS income winds up being taxed. I have taken the FTC for the small amount of tax that results on my 1040. I show the SS as resourced income on Form 1116. I do not take a tax credit for the US tax on my Canadian return for the SS I report.
Is this the correct way to report my SS on my 1040? Is excluding the SS and not reporting it on Form 1040 also acceptable to the IRS? Are both ways acceptable? If so, I will continue to report the SS on my 1040 and take the FTC. I cannot file electronically if I exclude the SS on my 1040 since it will probably be rejected. Thanks for any help as in the past.
nelsona
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Re: US Social Security income reporting on Form 1040

Post by nelsona »

You should not exclude the SS, but you certainly can include the gross amount, and then make the taxable amount 0. This can be e-filed. You should submit an 8833 with this. The same procedure would be used for CPP and OAS once you collect those.

That has become my preferred method over re-sourcing, since re-sourcing would REQUIRE you submit an 8833 (you should anyways), may not result in completely 0 tax in US as it should (especially if you have significant US-source income, like pension), and wouldn't work for CPP and OAS. Remember foreign tax credits are prorated over entire income, while deducting the specific income completely ensures it is not taxed.

I haven't had any issues with e-file doing it this way.
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Re: US Social Security income reporting on Form 1040

Post by Canadian Newbie »

Thanks for responding. I have not filed the 8833 in the past. Should I file amended with the 8833 or just file it going forward? I am afraid of penalties at this point.
I did not think that the 8833 was needed when it came to resourcing. The following are exceptions to filing under the Regs. I thought that one of them would apply and the 8833 would not be required.

(iv) That a treaty reduces or modifies the taxation of income derived from dependent personal services, pensions, annuities, social security and other public pensions, or income derived by artistes, athletes, students, trainees or teachers;
(vii) That a Social Security Totalization Agreement or a Diplomatic or Consular Agreement reduces or modifies the taxation of income derived by the taxpayer; or
(v) That income of an individual is resourced (for purposes of applying the foreign tax credit limitation) under a treaty provision relating to elimination of double taxation;
nelsona
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Re: US Social Security income reporting on Form 1040

Post by nelsona »

It is very rare that one MUST file an 8833, since there are income thresholds that need to be met.

However, I believe in filing 8833s in order to INFORM IRS of what you are doing on your tax return.
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Re: US Social Security income reporting on Form 1040

Post by Canadian Newbie »

What income thresholds are they? I never saw them on the 8833 instructions and they are not in the Regs.
I have not filed the Form 8833 for either the SS issue nor for my US interest that is resourced. Should I amend for the past three years and include the 8833? As I said, I am looking at penalties for not filing the 8833. I am hoping I will find someone that can help me with getting them abated. I assume if I hired Serbinski they could help me.
I don't understand your change regarding the filing of the 8833. On your response from 2016, you thought that I could skip the 8833.
I wish I could get an answer as to what the correct procedure is. Also, why does this section of the Regs not allow for the 8833 when it comes to the reporting of Social Security?
(iv) That a treaty reduces or modifies the taxation of income derived from dependent personal services, pensions, annuities, social security and other public pensions, or income derived by artistes, athletes, students, trainees or teachers;

Also, you cannot "zero out" the Social Security on line 20b. The way that the taxable portion of Social Security is derived makes it impossible. Try it and you will see what I mean.
nelsona
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Re: US Social Security income reporting on Form 1040

Post by nelsona »

Forget this.
Just file as I mention going forward. Six years later worrying about this is moot.
The instructions clearly state that filing for social security, along with a host of other regular income streams you might encounter, are waived.

"Positions for which reporting is waived include, but are not limited to, the following. See Regulations section 301.6114-1(c) for other waivers from reporting.
• That a treaty reduces or modifies the taxation of income derived by an individual from dependent personal services, pensions, annuities, social security, and other public pensions, as well as income derived by artists, athletes, students, trainees, or teachers;"

As I've said numerous times, the real purpose for anyone to file 8833 is to give IRS a clue as to what you are doing.
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nelsona
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Re: US Social Security income reporting on Form 1040

Post by nelsona »

As to your software issue, that you will have to ask them. Taxact works for me every year. Perhaps you aren't answering a box correctly.

"waived" does not mean "forbids".
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