Self-employment income in US and tax

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eortlund
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Self-employment income in US and tax

Post by eortlund »

My husband made about 10K in income from writing he did for a US publisher in 2015. Now the tax is due, and it wiped out the 2K we usually get for Additional Child Tax Credit plus we owe $172. I understand part of this tax is for Social Security and Medicare? Is there a way not to pay that part since we live in Canada?
nelsona
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Post by nelsona »

Of course.

First off, he is from SE tax in US.

Second, he can re-source the US income to Canada on 1116 and not have to pay any US tax, since that is what a Cdn citizen would do.

I've described re-sourcing sevral times.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
eortlund
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Post by eortlund »

Thanks! I will try to find old threads on that.
nelsona
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Post by nelsona »

"he is [exempt] form SE tax in US"
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
eortlund
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Post by eortlund »

If we don't re-source the income, how do we get out of paying the SS tax?
eortlund
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Post by eortlund »

Actually, I was searching TurboTax, and it said they would not add Social Security tax in if it wasn't already there. So perhaps the tax it said we owed does not even include it?
nelsona
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Post by nelsona »

SE tax will be added when you do the schedule SE and Schedule C. To exempt from SE tax you need to file a compliance letter. Re0sourcing won't take care of this.

Canada will not allow any tax deduction for what you owe in US, so you need to handle this on your 1040.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
eortlund
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Post by eortlund »

I ran the numbers, re-sourcing on a 1116 to Canada and found the tax would be way higher than if we just paid it to the US.

When you say a compliance letter, how does this work? Do you have a link to how I would get this? And how would I enter this into the turbo tax program?
nelsona
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Post by nelsona »

I think you are missing the point. This income will be fully reportable and taxed in Canada and US. Canada will not allow any tax credit for the US tax.

You do realize that you are fully taxable in both countries, right? You don't get to choose what you report to each country. You report all income to both countries.


So, for this SE income, which you report in both countries, the only way to reduce your US tax on this US income (since Canada will not allow a credit) is to use the treaty re-sourcing provision. Your tax in Canada won't change, since you had to report the income there too. Your tax in US has to be lower, since you will reduce the tax on it to zero, and you will also exempt the SE tax.

You'll have to figure out trhe software. look a the printouts and you willsee whee the tax in being added, and how the re-source 1116 (and your other 1116's) is working.

Certificate of coverage:
http://www.cra-arc.gc.ca/E/pbg/tf/cpt56/
IRS may or may not need this, but you should file for one in case they ask for it.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
eortlund
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Post by eortlund »

No I didn't realize that Canada would not allow any tax credit for the US tax. Why not? That seems strange that they would not allow a foreign tax credit. Is it because it is self-employment income? But yes, I did realize I have to tell Canada about it, just assumed I would get a tax credit.
nelsona
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Post by nelsona »

It is because it is income that would not be taxed if you were not a US citizen. Its a treaty regulation, which is why you get to use the "re-source BY TREATY" option of 1116.
many USC's living in Canada with US-source income have to use this. You just hadn't come across this yet.

It is treaty Article XXIV(4) for your information.
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nelsona
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Post by nelsona »

Besides, in your case it is better to have the US tax reduced on the 1040, as this gives you your child tax credit back. otherwise, you would only be able to claim the "$172" in US tax, when really your tax was "$2,172" as you lost the child tax credit.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
eortlund
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Post by eortlund »

Wow, that seems confusing. So are you saying if I was just Canadian, and I made income in the US, Canada would not tax it? It's only taxed because we are US citizens? That can't be right.

As for your second post, when I entered the income into my Canadian return as foreign income, but with no foreign tax credit, the amount was way more than $2172. $4000 something if I recall correctly.
nelsona
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Post by nelsona »

Your confusing the 2 returns.

Your US-based SE income is fully taxable in Canada, whether you are a US citizen or not. That is, say $4000 that you were absolutely going to owe Canada anyways.

If you were not US citizen, you would not have to report SE income to IRS. That is a provision in the treaty that exempts SE income made by non-residents under certain conditions. You would simply report the income in Canada and pay Cdn tax.

However YOU, as a US citizen have to report this income in US -- you have no option. In the treaty article I mentioned previously, Canada will not give you credit for any US tax you might incur on that income, because you are only paying it because you are a USC.

So, the remedy that the treaty allows is to have IRS credit your with the US income tax that you would be paying on this income (reducing the US tax to zero). That is done by the re-source 1116 method.

Additionally, because you live in Canada and US has a Totalization agreement with Canada, you are exempt from paying the SE tax (the Social security premium for self-employed people) by that agreement.

So, rather than owing some income tax to US and some SE tax to US (which would have wiped out your child tax credit) and a lot of Cdn tax, you instead get to pay zero tax in US, keep your $2000 child tax credit, and pay the Cdn govt the entire bill, just a little more that n you would have otherwise.


Now, to your last post:

You said: "So are you saying if I was just Canadian, and I made income in the US, Canada would not tax it? It's only taxed because we are US citizens?"

No. read carefully. If you were just a Cdn and made SE income in US -- the UNITED STATES would NOT tax it. It is only being taxed in the US because you are a USC.

You said "when I entered the income into my Canadian return as foreign income, but with no foreign tax credit, the amount was way more than $2172. $4000 something if I recall correctly.".
$4000 seems right. You were going to have to pay this anyways. The $2172 is the amount you SAVE on your US return by using the treaty. Your fist post said that instead of getting $2000 child tax credit, you were now owing $172. By filing this income correctly in US (using 1116 and the Totalization agreement) you restore your $2000 refund. That is a $2172 saving using your numbers.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
eortlund
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Joined: Tue Aug 07, 2007 12:18 pm

Post by eortlund »

Thanks! I think I get it now.
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