FEIE - increasing my tax burden?

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cosurshe
Posts: 13
Joined: Sat Mar 16, 2019 12:15 pm

FEIE - increasing my tax burden?

Post by cosurshe »

I moved from USA to Canada last year. I was a resident alien of USA in 2018. I'm filing the 1040 joint return with the intention of excluding any self-employment income (consulting work for US client) and Canadian employer income we made after we moved to Canada. I'm using TurboTax to file our taxes.

Using TT, without entering my foreign income, we (me and my spouse) are supposed to get x amount refunded to us.

Once we enter our foreign income and get the exclusion (for the entire income - below the 104k limit combining both our incomes) the amount of changes to y, where x > y.

If our entire Canadian incomes are excluded, how does the tax refund reduce (hence increasing the taxes I pay)?
nelsona
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Location: Nowhere, man

Re: FEIE - increasing my tax burden?

Post by nelsona »

Because you are setting up a false expectation.
What you should be doing is reporting all your income, and then seeing what the tax would be, then taking FEIE.

You see, you are not allowed to file 1040 without reporting all income, so, if you were reporting only Cdn income, you would be filing MFS dual status with the higher taxrate. Go ahead and try that and see how much higher your tax bill is.

FEIE doe not take the foreign income off the top, it blends it with your other income.

Remember too, that you don't get the full exemption in this partial year, and that you cannot file FEIE until you meet the 330 days outside US.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
cosurshe
Posts: 13
Joined: Sat Mar 16, 2019 12:15 pm

Re: FEIE - increasing my tax burden?

Post by cosurshe »

Hey Nelson, as always thanks for taking the time respond.

I misworded my original post.

I mean to say that I'm including all our income (income made in USA from US employer, income made in Canada from US employer, income made by consulting for a US company while living in canada, and income made from Canadian employer while living in Canada) with the intention to have the income excluded using 2555, while filing 1040 MFJ.

However, after running the numbers, looks like our income after coming to Canada was more than what FEIE will allow us to exclude (based on the number of days present in Canada). So, that's why our tax burden increases. I'm wondering if it'd be a better route to just go with Foreign Tax Credit (Form 1116 - since we're paying taxes on our Canadian income (+ income from consulting for US companies while living in Canada) in Canada).
cosurshe
Posts: 13
Joined: Sat Mar 16, 2019 12:15 pm

Re: FEIE - increasing my tax burden?

Post by cosurshe »

cosurshe wrote:
> Hey Nelson, as always thanks for taking the time respond.
>
> I misworded my original post.
>
> I mean to say that I'm including all our income (income made in USA from US
> employer, income made in Canada from US employer, income made by consulting
> for a US company while living in canada, and income made from Canadian
> employer while living in Canada) with the intention to have the income
> excluded using 2555, while filing 1040 MFJ.
>
> However, after running the numbers, looks like our income after coming to
> Canada was more than what FEIE will allow us to exclude (based on the
> number of days present in Canada). So, that's why our tax burden increases.
> I'm wondering if it'd be a better route to just go with Foreign Tax Credit
> (Form 1116 - since we're paying taxes on our Canadian income (+ income from
> consulting for US companies while living in Canada) in Canada).


And by excluded in this post, I mean have the Canadian incomes excluded using 2555.
nelsona
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Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Re: FEIE - increasing my tax burden?

Post by nelsona »

No need to "wonder". Your software gives you the option of using 2555 or 1116. Go ahead and try both and see what you get. and, you are allowed to use 1116 on the extra income if you need to, along with 2555.

I'm not sure why your tax burden would increase after you excluded some income. Even some income excluded would lower your taxes. Sounds like you are making some mistake. I would make sure this was done properly first.

Remember that you cannot file 2555 until you meet PPT.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
cosurshe
Posts: 13
Joined: Sat Mar 16, 2019 12:15 pm

Re: FEIE - increasing my tax burden?

Post by cosurshe »

Thanks. I'll start from the beginning. Btw, to file 1116, I should know exactly how much taxes I will have paid CRA, right? and for the gross income, am I including contributions to RRSP, CPP, EI, etc from the Canadian side?
nelsona
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Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Re: FEIE - increasing my tax burden?

Post by nelsona »

of course you need to complete both returns (without foreign tax credits) before you can apply foreign tax credits., which you then only apply once to each return.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
skobes
Posts: 33
Joined: Sat Mar 25, 2017 10:41 pm

Re: FEIE - increasing my tax burden?

Post by skobes »

cosurshe: I also found, to some surprise, that FEIE was very disadvantageous, compared to not taking it.

The reason is that it is not an "exclusion" in any reasonable sense of the word. Have a look at the Foreign Earned Income Tax Worksheet in the instructions for 1040 line 44. It works as follows:

1. compute your tax without regard to the "exclusion"
2. compute an amount of tax on the exclusion, figured as if the "exclusion amount" were a person's only income
3. subtract result of 2 from result of 1

Because US taxation is progressive, this is much worse than computing tax on (income - exclusion). It is worse even than a pro rata reduction of tax by a ratio such as (exclusion amount / total income).

Given Canadian tax rates it is likely that if you elected not to exclude the income under FEIE, all of the tax attributable to that income would be reclaimed by FTC. I think this would leave you much better off in most cases.

But of course you should try it both ways and do whatever works best.
cosurshe
Posts: 13
Joined: Sat Mar 16, 2019 12:15 pm

Re: FEIE - increasing my tax burden?

Post by cosurshe »

@skobes : how would all the tax be reclaimed by FTC? I thought there is a limit on the amount of FTC per person on the return.. or did I mis read that on one of the posts on this forum? I've posted a more detailed question over here: viewtopic.php?f=2&t=13335

This year, filing has been nuts.. I'm half tempted to just file a dual status return (simplest of them all) and finally bring my tax related ties to USA to an end!!!
skobes
Posts: 33
Joined: Sat Mar 25, 2017 10:41 pm

Re: FEIE - increasing my tax burden?

Post by skobes »

All of the US tax *on the CA-source income* is reclaimed by US FTC (assuming you pay more CA tax on the same income). The "limit" you refer to is the separation of US tax on CA-source income, from US tax on US-source income.

You will still have a higher effective rate than a hypothetical 1040NR that reports only the US-source income. Effective rate as US resident is determined before credits and considers income from all sources (US + CA).

But the FTC's proportional reduction is better than the FEIE's subtraction given the assumptions I have stated.

disclaimer: I am not a CPA and I generally know less than nelsona
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