Where Does RESP Withdraw by Student go on his US 1040?

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DrJFM
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Joined: Wed Jun 05, 2013 6:53 pm
Location: PEI

Where Does RESP Withdraw by Student go on his US 1040?

Post by DrJFM » Thu Mar 10, 2016 6:21 pm

I am living with all the 3520, 3520A stuff. I do FBAR reporting and report my RESP gains on my own 1040. US Owner --me-- of RESP; US Beneficiary --my son-- just began withdrawing for university, Both dual Citizens of Canada and US.

This is the first time I had to help my son report his RESP withdraw as income on his US tax return. We have the requisite substitute 3520A filed and have filled in the 3520 Beneficiary statement. I am just not seeing the obvious place to enter this RESP withdraw for his 1040. I can't be the only one now facing giving my US citizen beneficiary the money for school from an RESP.

I have long ago moved the RESP into all cash equivalents so only have simple interest (and not much of that) to report as income on my 1040. All withdraws are coming out as cash. Since no tax was ever paid in Canada on education grants, he claimed this as income on his Canadian Tax. Still owed no tax and that will likely follow in US, if I can figure out where he should enter it on his 1040. No mutual funds, no 3520 issues, just where to enter the money shown on the 3520 on beneficiaries tax return.

nirvana_1959
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Post by nirvana_1959 » Fri Mar 18, 2016 9:33 am

My $0.02. Converting RESP to cash is not going to make income earned in RESP disappear. You still have to deal with it when EAP is made to your son. In my case my son (beneficiary) is dual citizen and I am Canadian citizen/resident. Reported the EAP on 3520 followed by convoluted calculation to figure out ordinary income (and accumulated distribution) part of the EAP. This got reported on my son's 1040 Line 17 via Schedule E (which got the amount from 3520, I think).

DrJFM
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Joined: Wed Jun 05, 2013 6:53 pm
Location: PEI

Post by DrJFM » Tue Apr 05, 2016 3:11 pm

Thanks, nirvana_1959.

As a US Citizen, I have to track all yearly gains in a trust ie RESP on my US fillings (3520, 3520A and 1040), so in the end I just settled for the government grant and a low rate of simple interest in a money market (cash) holding. Cash hasn't been a bad place to be for the last few years anyway.

With my son's (the RESP Beneficiary) 1040, my tax software didn't seem to accommodate any Schedule E appropriate data entry points, so I ended up listing it on Line 21, "Other Income" with a supporting worksheet listing the amount from the 3520 and identifying it as a "Canadian RESP Distribution". And yes, the 3520 calculation to yield the amount I entered was very convoluted. Will update if they take any issues with my filings.

MGeorge
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Location: Canada

Post by MGeorge » Wed Apr 06, 2016 11:18 am

Hi DrJFM,

Your son doesn't have to report any income from the RESP on his US tax return.
For Canadian tax purposes, your son has to report the portion of the RESP withdrawal that is considered "EAP", but this is for Canadian purposes only.

This is the problem with US persons own RESPs.

US Tax Purposes:
You as the owner have to report all of the gains from the sale of RESP assets, and any income from the RESP assets. Once you have reported all this income, you are simply giving money to your son for school purposes (no gift tax applies, as it is for school). Your son simply reports receipt of the gift, nothing goes on his 1040.

I hope this helps.

Best REgards.
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MGeorge is neither an accounting nor taxation professional.

CdnAmerican
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Joined: Tue Aug 30, 2011 12:15 am

Post by CdnAmerican » Wed Apr 06, 2016 7:06 pm

MGeorge - Thanks for this; I have wondered about this as well (though my distributions to my child are a couple of years away). I file the 3520/3520A on the RESP each year in my name.

I claim the gains in the RESP each year on my 8621, using mark-to-market. I don't make enough income for that to be taxable (knock wood).

To clarify what you are saying, there is no need then for us to report any RESP distribution? Or, would we claim the distribution on a 3520 she completes, but not count it as income?

Thanks!
Not a professional opinion.

MGeorge
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Location: Canada

Post by MGeorge » Wed Apr 06, 2016 8:19 pm

Hi CdnAmerican,

So, when the RESP makes a distribution to your child, this would get reported in 3520A on line 17c. 3520A would be an attachment to your 3520 and as you probably know, you only have to complete parts I and II of 3520.

When your child (I'm assuming is a US citizen right?) receives the distribution, he/she would have to file 3520, and check the 3rd box right at the beginning. Then he/she would only complete part III, and since the RESP filed a 3520A with beneficiary statement, your child would only report receiving the distribution. At this point, it is a gift, after tax, and no gift tax applies because it is for school.

Cheers!
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MGeorge is neither an accounting nor taxation professional.

MGeorge
Posts: 300
Joined: Fri Jun 22, 2012 9:23 am
Location: Canada

Post by MGeorge » Thu Apr 07, 2016 11:59 am

Hello DrJFM, CdnAmerican,

I found some good supporting information at:

http://www2.deloitte.com/content/dam/De ... 021315.pdf

We know that an RESP is a foreign grantor trust. Since you the owner have been filing 3520A with the required beneficiary statements, none of the distribution to your child is taxable on his/her 1040. He/she just files 3520, states the distribution amount and confirms that a foreign grantor trust beneficiary statement has been received. It looks like that beneficiary statement is the key!

Best Regards.
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MGeorge is neither an accounting nor taxation professional.

CdnAmerican
Posts: 229
Joined: Tue Aug 30, 2011 12:15 am

Post by CdnAmerican » Fri Apr 08, 2016 12:39 am

Great - thanks MGeorge for this! I wondered how this would work, with a faint hope that the whole thing will be resolved on its own by the IRS (ha) by 2018 when this situation occurs. (Yes, she's a USC too.) This sounds straightforward; I had heard rumblings of double taxation with it, but this sounds like it would be OK (as it should be, as I've claimed the gains in it all the way through).

My only remaining question involves whether she also has to file a 1040, if she's otherwise under the income threshold for the 1040?

Thanks again!
Not a professional opinion.

MGeorge
Posts: 300
Joined: Fri Jun 22, 2012 9:23 am
Location: Canada

Post by MGeorge » Fri Apr 08, 2016 10:12 am

No problem - this is interesting one. I saw an article from Jamie Golumbek that says there have been a few submissions to the US government supporting the recognition of RESPs, RDSPs and TFSAs. I am hopeful, but expect it will be a while before there is any meaningful change.

The rumblings you heard about the double taxation of RESPs for dual citizens is likely the fact that the US taxes the RESP subscriber currently as income is earned, then the Canadian government taxes the grants and income when received by the child. So, the foreign tax credit mechanism is of no use, so in effect the income is taxed twice.

I hope DrJFM sees this, and doesn't report the income on his child's 1040.

Best Regards.
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MGeorge is neither an accounting nor taxation professional.

JohnSt
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Joined: Wed Mar 07, 2007 2:33 pm

Post by JohnSt » Fri Apr 08, 2016 1:51 pm

MGeorge -- so how do you think this would work then for a US citizen child of Canadian-only citizens? As non-resident aliens, there is no obligation for the owner of the RESP to report to the IRS. However, the child then withdraws and reports to the IRS -- but no income was reported or paid up to that point.

nelsona
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Post by nelsona » Fri Apr 08, 2016 2:07 pm

Its still a gift, tax-free.

This would be like an inheritance from a Cdn parent to a US citizen child. Just because IRS hasn't had their share of the income tax over the years doesn't entitle it to some now.
Nelsona Non grata. Non pro. Search previous posts. Happy Browsing :D

JohnSt
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Post by JohnSt » Fri Apr 08, 2016 2:28 pm

So is the distribution treated simply as a gift (part IV of form 3520) or as a foreign trust distribution (part III of 3250)?

nelsona
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Post by nelsona » Fri Apr 08, 2016 2:56 pm

Part III
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nelsona
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Post by nelsona » Fri Apr 08, 2016 3:04 pm

... along with a beneficiary statement (3520-A) from the parent.
Nelsona Non grata. Non pro. Search previous posts. Happy Browsing :D

MGeorge
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Location: Canada

Post by MGeorge » Fri Apr 08, 2016 3:08 pm

Hi JohnSt

Yes part III as nelsona says. Unfortunately, in this case the US beneficiary would have to complete schedule A and C or B and C of part III, and this means there could be tax and throw-back interest on any accumulation distribution.

This seems worse than if the RESP had a US citizen subscriber. On the other hand, it is the student paying tax in this scenario who is likely in a very low income situation.
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MGeorge is neither an accounting nor taxation professional.

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