Filed a 1040NR in 2016, is it worth amending to a 1040 now?

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minster
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Filed a 1040NR in 2016, is it worth amending to a 1040 now?

Post by minster »

I moved to the US from Canada in October 2016. I did not meet the substantial presence test in 2016 so I filed a 1040NR.
I've read that I can elect First Year Choice for 2016 and amend by return to a 1040 at this point. In what cases does this make sense? Is it a simple amendment with the 1040x or do I have to report my world income (so my all my canadian income from jan-sep) as well?

I filed a 540NR for California that year, I am guessing I would need to amend that as well?

Any help or articles that can point in the right direction would be appreciated.
nelsona
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Post by nelsona »

You could, but since your US income level would be pretty low for 2016, it is probably not worth changing.

You would have to report Cdn income on 1040 and then use 1116 and/or 2555 to reduce the US tax on the income.
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minster
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Post by minster »

Thank you for your reply Nelsona. Is there a straightforward way to tell if its worth changing or not? I ask because I received a signing bonus and I just want to make sure i'm not leaving a significant amount on the table.
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Post by nelsona »

You would need to actually do the tax return, since you would need to determine foreign tax credit/foreign exclusion as well as what deductions you would be allowed.

If you are single, it is unlikely to help. If you are married however, and your spouse had low world income in 2016, it might be.
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Post by minster »

Married and my wife had no income.

I’ll go ahead and crunch some numbers then. Thank you nelsona again.
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Post by nelsona »

use the 2017 software versions which should be easily accessible if you don't have 2016, there wasn't much tax changes, and do a 1040NR like last year, and a 1040, including your 2016 Cdn income
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Post by minster »

I used taxact to file my 2016 return. I’ll just enter my Canadian income on iit and change my status to resident and see how it goes.
nelsona
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Post by nelsona »

If 2016 taxact is still working, then I would start with changing your filing status first: married filing jointly, full year resident, standard deduction, then add your Cdn income, then choose whether to exclude the Cdn wages or use foreign tax credit, the use credit on anuy other income, then itemize deductions, all in that order.
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minster
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Post by minster »

Just a follow up:
It was not worth amending my taxes to a 1040 in my case. My Canadian income was taxed at a lower rate in Canada than it is in the US, and the extra deductions I get from filling a 1040 do not make up this tax difference.
nelsona
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Post by nelsona »

Did you use the eclusion? It would not be taxed in US at all. Are you married? Then the taxrate goes down.
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minster
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Post by minster »

Thanks for pointing that out. I had ignored the exclusion as I though I was not eligible, but upon further investigation it seem that I am. However I think there might be something I am missing or an error in the calculations since changing to a 1040.

I am looking at Total Income (line 8), Taxable Income (line 43) and Tax (line 44).
- Added my foreign income: This increased Total Income by that amount.
- Added the foreign income exclusion: which subtracted it from Other Income (line 21)

Now adding the foreign income and exclusion kept the Taxable Income the same, as expected, but the tax amount after the foreign income is much higher.

Everything else in my return seems identical, filling status, exemption etc. I'll keep reading to try and find out why, at worst case I might contact taxact to see if this is a problem with calculations on their end.
nelsona
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Post by nelsona »

Yes, that is quite likely that if the exclusion does not make you non-taxable, that it can be more than without including the income at all. But is it less than the 1040NR calculation, since 1040NR was not a joint return? That is the key question for 2016.

But as I said at the outset, this is why we try both (or in many cases all three ways of filing) in an arrival year: to lower the US tax for that year.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
minster
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Post by minster »

The calculations with a 1040NR actually yielded a larger return.

The part that I guess I’m failing to understand and that is bugging me is the tax calculation for my 1040 w/ Canadian income and exclusion vs without Canadian income and exclusion. Since both yield the same Taxable Income, how is it that the tax amount is different?
minster
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Post by minster »

Figured it out! Method for calculating tax when there is a foreign income exclusion is not the same as without one. Without one you would just refer to the tax table. But with foreign income exclusion you actually get the tax amount from the table for the total of taxable income + foreign income, and the substrat the tax table amount of your exclusion.
Essentially you are taxing your foreign income at your highest tax rate, and getting a credit for tax on this foreign income as if it were your only income.

For anyone needing more details check out the Foreign Earned Income Tax Worlsheet on the IRS instructions for form 1040.


https://www.irs.gov/pub/irs-pdf/i1040gi.pdf

Cheers!
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Post by nelsona »

Yes, this is known. It was changed over a decade ago, under anti-stacking provisions. Not quite how you describe it (which is how foreign tax credit works), but essentially is averaged. FEIE (2555) is still usually better than FTC (1116).

It used to be the foreign exclusion came of the top. Now the excluded an non-excluded income is blended.

Still surprised how 1040 MFJoint would give higher that 1040NR MFSeparate, but there are some sweet spots (I guess 'sour spots') in the tables where the foreign spouse's income can hop you up a bracket.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
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