Correctly completing form 1116 and 405 - exited the US in June2018 but had US income for the first month or so in Canada

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karthikkan
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Joined: Wed Mar 20, 2019 12:42 pm

Correctly completing form 1116 and 405 - exited the US in June2018 but had US income for the first month or so in Canada

Post by karthikkan »

I was a resident alien in the US for 2018, and moved out of the US and into Canada late in June 2018. However, until mid-July or so, I continued to have income from my US employer. Currently, my plan is to use form 1116 and not 2555, since I will spend less than the 330 days required after exiting the US in Canada ( it's closer to ~ 290 days that I will spend in Canada, due to business travel requirements ). Starting mid-July 2018, I only have income from my Canadian employer, so things are slightly simpler.

I'm wondering how to go about computing the amounts on forms 1116 and form 405. I can figure out the exact amount that I received as US income from the time I became a tax resident of Canada, but how does one properly compute the tax paid on this amount? Mainly wondering since, my US return is a married filing jointly return, and hence has a lot of other income - eg. my spouse's income, interest income, capital gain, dividends etc.

On form 1116, do I report Canadian taxes paid on my US income when I was a Canadian tax resident + Canadian income, or do I need to do something else?
nelsona
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Re: Correctly completing form 1116 and 405 - exited the US in June2018 but had US income for the first month or so in Ca

Post by nelsona »

The income from wages is not eligible for 1116 or 2555 of course, since it is not foreign income.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
karthikkan
Posts: 3
Joined: Wed Mar 20, 2019 12:42 pm

Re: Correctly completing form 1116 and 405 - exited the US in June2018 but had US income for the first month or so in Ca

Post by karthikkan »

Thank you @nelsona. If I understand correctly, my income is split in the following ways ->

US Employer Income + Canadian Employer Income. Some part of US Employer Income, was earned when I was a Canadian tax resident, which I only became in late June 2018. I believe that any income from my Canadian Employer is eligible for the 1116, correct?

In addition, I would do the following ->
1. Pay Canadian taxes on Canadian Employer Income + US Employer Income earned when a resident of Canada from late June. I would get to use line 405 on my Canadian return to deduct any taxes I paid to the US on the amount of money I made from my US employer when I resided in Canada, in the Canadian tax return.
2. Pay US taxes on worldwide income for 2018, since I was a resident alien in 2018. However, since I was a resident of Canada as well from late June 2018, I would get to deduct the Canadian taxes I paid on my Canadian sourced income (and NOT the US source income) from my Canadian employer using form 1116, while completing my tax return.

Does that sound accurate?
nelsona
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Re: Correctly completing form 1116 and 405 - exited the US in June2018 but had US income for the first month or so in Ca

Post by nelsona »

You can (and probably still should use 2555 for your Cdn income. You can do this at the end of 2019, since you will then satisfy bona fide test. even if you had not spent any time in US, you would only be eligible for 2555 in June. 2555 will work out better for you based on your mid-year move, my experience tells me. Anyway, you always should do it both ways to see.

But for filing at this time you are limited to 1116. Your 2 points are correct.
Remember though to PRORATE the taxes when determining the foreign tax. for example, if you report 100K in US and you are including 10K on your Cdn return, you claim 10% of the total fed tax you first calculated. same principle for any state tax you calculate. For FICA, you include the fica taxes that were deducted from those paychecks that you are including in Canada.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
karthikkan
Posts: 3
Joined: Wed Mar 20, 2019 12:42 pm

Re: Correctly completing form 1116 and 405 - exited the US in June2018 but had US income for the first month or so in Ca

Post by karthikkan »

Thank you once again, @nelsona. Very useful information - did not know of the existence of the bona fide residence test and IRS Form 2350 that we need to file to qualify for the bonafide residence test.

Would love to know if anyone here has used any software to e-file form 2350 to get an extension to qualify under the bona-fide test. Only seem to get extension tax as a solution when I look online, but slightly hesitant to enter things like SSN's until I can confirm that they are legitimate.

The one interesting situation that came up was that in my state of residence before leaving the US, ( California ), they mention that their deadline to file taxes is Dec 15th, 2019 for the tax year. (Automatic 6 month extension for individuals + additional 2 month extension if you live abroad ). Their suggestion was to estimate file 1040 and file state taxes first ( by Dec 15th ), and subsequently file an amendment if required. Interesting situation - first time I would have actually filed a state return before a federal return. Mainly interesting because Turbotax does not support this way of filing state before federal based on an estimate, so I'm likely going to be on the lookout for software that supports it/if nothing does, go the paper filing route :-)
Betfner20
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Re: Correctly completing form 1116 and 405 - exited the US in June2018 but had US income for the first month or so in Ca

Post by Betfner20 »

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