Year of renunciation: 1040 only or combination 1040/1040NR

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formerpatriot
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Location: Montreal

Year of renunciation: 1040 only or combination 1040/1040NR

Post by formerpatriot » Wed Jan 30, 2019 7:57 pm

My wife renounced her US citizenship in October 2018.
We are trying to do her tax return for the year 2018.
A multitude of web sites say that we must do the following:
- 1040 for the part of the year from January 1 to Day Before Renunciation. Include world wide income (In our case the salary from her Canadian employer + about 2200 CAD (i.e. 1700 USD) in interest from Canadian sources). Write "Dual Status Statement" on top of 1040. Do not sign 1040.
- 1040-NR for part of the year from Day of Renunciation to December 31. Include only income from US sources (in our case 0$). Write "Dual Status Return" on top of 1040-NR. Sign 1040-NR.
- 8854
In our case, add 2555-EZ, 1040 schedules 1, 6 and B, 8938.

In an old discussion on this forum (2013 or 2014?) nelsona mentioned that the taxpayer can choose to simply file a 1040 covering the whole year.
Is that the case? Am I missing something?

In our case, the 1040 + 1040-NR results in a tax liability of 170$ because the standard deduction is not allowed.
If we were to do the 1040 for the whole year, the 2555-EZ would wipe out the salary from her Canadian employer and the standard deduction would wipe out the 170$ tax on the Canadian interest.
FormerPatriot in Montreal

nelsona
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Re: Year of renunciation: 1040 only or combination 1040/1040NR

Post by nelsona » Wed Jan 30, 2019 8:46 pm

When you renounce, you have to do dual status. I think your forego the possible election to file full-year because you are renouncing.
Remember that on your 1040NR, you bring forward any income from the 1040 portion that you filled.
You may of course use 1116 to eliminate the US tax on the foreign income you included on the 1040.
Nelsona Non grata. Non pro. Search previous posts. Taking period between now and June off. Will only answer sporadically.

formerpatriot
Posts: 32
Joined: Mon Feb 23, 2015 4:13 pm
Location: Montreal

Re: Year of renunciation: 1040 only or combination 1040/1040NR

Post by formerpatriot » Wed Jan 30, 2019 9:48 pm

nelsona, thank you for your reply.

I was going to do the following:
- Report Canadian salary (up to renunciation day) on 1040 line 1 (in US dollars of course).
- Report Canadian taxable interest (up to renunciation date) on 1040 line 2b (in US dollars of course).
- Fill 2555-EZ to nullify the amount on 1040 line 1 (i.e. 2555-EZ ==> Schedule 1, Line 21 ==> 1040 next to Line 6 in parenthesis... so that 1040 Line 6 ends up being equal to 1040 Line 2b. Tax due on the amount of Line 6 (which is same as Line 2b) is 170$ (on 1040 line 11 and 1040 line 22).
- Take this 170$ tax due on 1040 statement and bring it to 1040-NR Line 42 (check box c and write "See 1040 statement"). Done!

You seem to suggest that I should not use 2555 and that
- the amount on 1040 Line 1 should be transferred to 1040-NR Line 8,
- the amount on 1040 Line 2b should be transferred to 1040-NR Line 9a,
- 1040-NR Line 41 (Taxable income) would end-up being (in our simple case) the sum of Line 8 and Line 9a,
- Use Form 1116 and report the foreign tax credit on 1040-NR Line 46. Done!

Is that what you are saying?
FormerPatriot in Montreal

nelsona
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Re: Year of renunciation: 1040 only or combination 1040/1040NR

Post by nelsona » Thu Jan 31, 2019 8:37 am

No, not suggesting that. I'm suggesting you ALSO use 1116 on your interest income, on 1040, to reduce your tax to zero on 1040.
Nelsona Non grata. Non pro. Search previous posts. Taking period between now and June off. Will only answer sporadically.

formerpatriot
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Joined: Mon Feb 23, 2015 4:13 pm
Location: Montreal

Re: Year of renunciation: 1040 only or combination 1040/1040NR

Post by formerpatriot » Thu Jan 31, 2019 9:30 am

Thank you again.
It was not your comment "use 1116 to eliminate the US tax on the foreign income you included on the 1040" that puzzled me. It was your previous comment: "Remember that on your 1040NR, you bring forward any income from the 1040 portion that you filled". Do you mean (a) "bring forward to 1040NR any income remaining on the 1040 after it was greatly reduced by 2555/1116" or do you mean (b) "bring forward to 1040NR all income reported on 1040, then use 2555/1116 to reduce taxable income on 1040NR". Approach (a) seems much simpler.
FormerPatriot in Montreal

nelsona
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Re: Year of renunciation: 1040 only or combination 1040/1040NR

Post by nelsona » Fri Feb 01, 2019 8:30 am

According to you, you can bring forward the tax. I have always understood that it is the income you bring forward. I was only going by what you seem to have found.
Nelsona Non grata. Non pro. Search previous posts. Taking period between now and June off. Will only answer sporadically.

nelsona
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Re: Year of renunciation: 1040 only or combination 1040/1040NR

Post by nelsona » Fri Feb 01, 2019 10:14 am

But, assuming you are indeed supposed to calculate tax on 1040NR, you are allowed to use 1116 to take credit for foreign taxes on 1040NR under some circumstances. I would think this is one of them. Pub 519 is your guide to dual status filing.
Nelsona Non grata. Non pro. Search previous posts. Taking period between now and June off. Will only answer sporadically.

nelsona
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Re: Year of renunciation: 1040 only or combination 1040/1040NR

Post by nelsona » Fri Feb 01, 2019 10:16 am

2555 reduces INCOME. You would apply this on 1040. 1040NR is where you calculate tax in an exit year, and that is where you would take any tax credits.
Nelsona Non grata. Non pro. Search previous posts. Taking period between now and June off. Will only answer sporadically.

formerpatriot
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Joined: Mon Feb 23, 2015 4:13 pm
Location: Montreal

Re: Year of renunciation: 1040 only or combination 1040/1040NR

Post by formerpatriot » Fri Feb 01, 2019 3:40 pm

I agree with your last comment. It makes more sense than any other approach that I have considered or that I have read about. I will report salary and interest on 1040, reduce (in fact eliminate) salary on 1040 with 2555, bring forward adjusted gross income from 1040 to 1040NR, then (if possible, if appropriate, under some circumstances) use 1116.

Thank you nelsona. I have spent a lot of time on this. You have helped me see some of my mistakes and you have helped me arrive at a conclusion that seems correct, or at least acceptable.
FormerPatriot in Montreal

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