US Citizen living in Canada filing US taxes as Married Filing Separately because Canadian Citizen Canadian Resident spouse doesn't want/need to file in the US.
The changes being proposed by the Trump administration would eliminate the personal exemptions and increase the standard deduction to $30K for a couple filing jointly. Since I would no longer be able to claim spouse as an exemption, it seems like I would have to start filing MFJ or give up $1800 in tax breaks (15,000 std deduction for spouse at 12%). Am I understanding this correctly?
Trump Tax Plan Impact on Married Filing Separately
Moderator: Mark T Serbinski CA CPA
We're planning to move some amount of IRA funds to Canadian RSP while exchange rates are still good. In the past couple of years, the 4k exemption used in filing the 1040NR allowed a tax neutral move. With the exemption gone, it will cost something, but if I file MFJ, this allows the first 15k to be moved tax neutral. The filing process would be quite a bit uglier because Canadian spouse has TFSA containing mutual funds, facta, foreign income exclusion. We have to decide if it's worth the paperwork and loss of privacy.
Regarding IRA to RSP move, spouse is only 52. It's hard to say what the exchange rates will be if she holds on to the IRA for the next 7 years so I created a spreadsheet to estimate the taxes payable at various withdrawal amounts and can decide if it's worth paying a small amount of tax for a larger withdrawal. Last Feb she received 1.3925 on exchange.
Regarding IRA to RSP move, spouse is only 52. It's hard to say what the exchange rates will be if she holds on to the IRA for the next 7 years so I created a spreadsheet to estimate the taxes payable at various withdrawal amounts and can decide if it's worth paying a small amount of tax for a larger withdrawal. Last Feb she received 1.3925 on exchange.
CRA does not accept IRA to RRSP transfers unless they are lump sums. If you are merely using the IRA funds as a regular contribution that would be ok, but it is not considered a TRANSFER if done periodically. Are you also accounting for the 10% early penalty by IRS? And you are adding the full IRA to her Cdn tax return correct?
In any event, Trumps PROPOSED changes may or may not see the light of day.
Besides, if you live in Canada, you really don't care what the tax rate in US is. It is always less than your US tax rate, even on US sourced income, and would continue to be under this new proposal.
In any event, Trumps PROPOSED changes may or may not see the light of day.
Besides, if you live in Canada, you really don't care what the tax rate in US is. It is always less than your US tax rate, even on US sourced income, and would continue to be under this new proposal.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
Thanks for your reply.
Yes, we are doing the transfers as lump sums, being careful to move a different amount each year so that it does not look like periodic payments. The IRA converted to CAD is added to her Canadian income but is subtracted under CRA rule 60(j) in which special RSP contribution room is created. She is still able to take the foreign tax credit for the taxes paid in the US including the 10% penalty. In calculating the FTC, the foreign income is not reduced by the RSP deduction. This allows income taxes withheld on wages in Canada to be refunded because of the FTC. This is why it is considered tax-neutral. She has been audited by CRA on the FTC and it was fine.
Yes, the taxes owed in Canada are always greater than those in the US, but in this situation where it possible to move US funds to Canada with little or no tax impact, it makes sense to me to do this while exchange rates are favorable. I am just considering how the Trump tax plan, as currently proposed, might impact our strategy.
Thanks again for your input.
Yes, we are doing the transfers as lump sums, being careful to move a different amount each year so that it does not look like periodic payments. The IRA converted to CAD is added to her Canadian income but is subtracted under CRA rule 60(j) in which special RSP contribution room is created. She is still able to take the foreign tax credit for the taxes paid in the US including the 10% penalty. In calculating the FTC, the foreign income is not reduced by the RSP deduction. This allows income taxes withheld on wages in Canada to be refunded because of the FTC. This is why it is considered tax-neutral. She has been audited by CRA on the FTC and it was fine.
Yes, the taxes owed in Canada are always greater than those in the US, but in this situation where it possible to move US funds to Canada with little or no tax impact, it makes sense to me to do this while exchange rates are favorable. I am just considering how the Trump tax plan, as currently proposed, might impact our strategy.
Thanks again for your input.
And as long as CRA buys that these are non-periodic (I guess the fact that you pay the 10% tax serves as proof that IRS doesn't consider them periodic helps), and that she has enough Cdn income to raise her Cdn effective rate tax above her US tax rate, the strategy works. I don't think exchange rate matters, it would be always good
Just a caution, I'm quite sure she hasn't been "audited". Her returns have been assessed, and found acceptable, which is good, but she wasn't audited.
Just a caution, I'm quite sure she hasn't been "audited". Her returns have been assessed, and found acceptable, which is good, but she wasn't audited.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
Going back to my original post, I forgot about treaty article XXV. Would my spouse be able to use a pro-forma 1040 to calculate the effective tax rate and then file the 1040NR using the lower rate? I think this would allow a transfer of 15k from an IRA to RSP with US tax owing of $1500 (10% penalty) which could be a foreign tax credit against Canadian taxes owed.
No. XXV(3) only applies to Article XV (US Employment Income).
Your only hope is if they replace the exemption with some higher standard deduction for MFS, and allow 1040NR to use it.
Otherwise, you will have to bite the bullet and figure out if PFIC, FATCA, TFSA, etc, and the cost of the MFJ return make it worthwhile.
Your only hope is if they replace the exemption with some higher standard deduction for MFS, and allow 1040NR to use it.
Otherwise, you will have to bite the bullet and figure out if PFIC, FATCA, TFSA, etc, and the cost of the MFJ return make it worthwhile.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best