Turbo Tax, RRSP Distributions, Form 1116, Deductions, Credit

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canada68
Posts: 14
Joined: Wed Feb 09, 2005 11:23 am

Turbo Tax, RRSP Distributions, Form 1116, Deductions, Credit

Post by canada68 »

This post is intended primarily for those filing through Turbo Tax. Any help is appreciated.

I've been following all the threads, and I think I know what to do. But, Turbo Tax sure makes it tough on me. I'm ending up with an extra 5000$ of refund I don't think I deserve.

Here's my sitiuation: when I left Canada, my RRSPs were worth US$19,000. I cashed out in 2005 for US$36,000. RC withheld US$9,000. So, that leaves me with a gain of US$17,000.

The way I'm filling out Turbo Tax, it's doing it as if I've paid 9000 of taxes on a gain of 17000.

This is how I filled it out: I filled out a 1099-R as a Normal Distribution. For Box1, I've got a gross distribution of 36,000 and a taxable amount of 17,000 for Box2A and Box3 (Capital gain). Box4 I put the 9,000. (I think this faking of 1099-R is where I'm messing up.)

For taxes & credits, I get $2000.

When I look at the calculated return, it shows 17,000 in 16b (and 36,000 in 16a)
worryfreeinvestor
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Location: Seattle, WA

Post by worryfreeinvestor »

All I can say is that I have also struggled with TurboTax. I have Canadian income, including capital gains, and want to claim a foreign tax credit. It is very difficult to be confident that TurboTax knows what it's doing in this regard. If your foreign income and foreign tax paid are reported on a 1099, it does fine, but if your foreign investments are not held by a US financial institution, and therefore no 1099, you have to fudge around TurbTax making "fake" 1099s. That's ok for interest and dividends, I suppose, but for capital gains I am still struggling to figure out where I should input the tax paid to Canada into TurboTax.

If you look at the TurboTax user forum (hosted by TurboTax, domestic US persons with foreign income also find it difficult to execute.)
canada68
Posts: 14
Joined: Wed Feb 09, 2005 11:23 am

Post by canada68 »

Here's some links I found. It's at odds with what I've read here about "General limitation". I'll keep poking.
canada68
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Joined: Wed Feb 09, 2005 11:23 am

Post by canada68 »

nelsona
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Post by nelsona »

cap gains go on a separate 1116 than RRSP income.

RRSP is gen limit if you elected to have them treated as pensions (line 16a/b). Otherwise, if you are using 'pay-as-you-go' like worry must for California, then it would be treated as passive income.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
canada68
Posts: 14
Joined: Wed Feb 09, 2005 11:23 am

Post by canada68 »

I looked at the result from the Turbo Tax, doing it as I'm doing it, and removing the RRSP altogether. Here's the difference:

My income increased by 17,000$ with the RRSP as expected, making my tax obligation increase by 4000$. I get a 2000$ 1116 tax credit, making my extra tax obligation 2000$.

But in the Payments section, I have an extra 9000$ of taxes that I paid (withholding tax to Canada). I think the "fake" 1099-R is what's happening here. The tax obviously didn't go to IRS, and even though I marked it as "foreign address" in one of the check boxes, it's not responding to this.

Since I'm already getting the credit from the 1116, why do the 1099-R as well?

***

nelsona: I don't understand your distinction between cap gains and RRSP income, for the 1116. I'm treating my entire profit on the mutual fund RRSP (including the extra earnings on the currency conversion) as a capital gain. What are you considering as "RRSP income"?
canada68
Posts: 14
Joined: Wed Feb 09, 2005 11:23 am

Post by canada68 »

I had another thought on the matter. I'm still carrying substantial capital losses (more than 10K) from the bubble years. Couldn't I elect to treat my RRSP as regular capital gains?

Or, is it because I elected to file under 8935, 2002-23, 8891 means I can't do that? Perhaps, if I decide to not file my final 8891 this year, then I can treat it as normal capital gains, and save myself the entire headache of treating all this as foreign gains.

That is, I'll get better relief from using up my capital losses, than trying to use deductions or credits.
canada68
Posts: 14
Joined: Wed Feb 09, 2005 11:23 am

Post by canada68 »

When you fill out the "fake" 1099-R, put zero in the "Federal Tax Withheld" amount in Box 4. This clearly relates to US Federal, which is the problem I was having.

As for Credit or Deduction, you should try it both ways. In my case, the credit works out to being 700$ better.

***

I'm still looking into not applying for the foreign tax credit at all, and simply reporting my RRSP gain as a normal capital gain, not filing my 8891, and applying my capital losses that I accumulated from prior years. This will save me 2500$. I'll report back whatever research I uncover.
nelsona
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Post by nelsona »

You cannot use your previous cap losses as a credit on this years 1040. You would have had to be reporting these on your previous 1040s all along.

Besides, as you say, you already elected to ahve your RRSP treated as a pension, so the income is pension income (line 16).


1116 works on the principal that you get credit at you effective rate, while income is added to your return at the marginal rate.

Your fake 1099 should only have 2 entries: the gross ammount withdrawn from your RRSP, and the taxable ammount. Period. There was no US tax withheld, so you cannot justify putting any tax on the form. Your Cdn tax goes ONLY on 1116.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
canada68
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Joined: Wed Feb 09, 2005 11:23 am

Post by canada68 »

nelsona wrote:You cannot use your previous cap losses as a credit on this years 1040. You would have had to be reporting these on your previous 1040s all along.
Luckily, TurboTax keeps track of all that for me, all these years. It's carried forward on every return. So, it's there for me.
Besides, as you say, you already elected to ahve your RRSP treated as a pension, so the income is pension income (line 16).
This is true, I have been doing it. However, all the gain was, until I cashed out, unrealized capital gains. If I elect not to file the 8891 for 2005, wouldn't this imply that I decided to no longer treat this as a pension, and therefore lose this status? Which then obligates IRS to treat this account as a regular account? It's an interesting dilemna I think.
1116 works on the principal that you get credit at you effective rate, while income is added to your return at the marginal rate.

Your fake 1099 should only have 2 entries: the gross ammount withdrawn from your RRSP, and the taxable ammount. Period. There was no US tax withheld, so you cannot justify putting any tax on the form. Your Cdn tax goes ONLY on 1116.
Yes, agreed. I saw this after I printed out the TurboTax forms, that I obviously was overcrediting myself on taxes paid.
canada68
Posts: 14
Joined: Wed Feb 09, 2005 11:23 am

Post by canada68 »

By the way, I appreciate the assistance by all.
canada68
Posts: 14
Joined: Wed Feb 09, 2005 11:23 am

Post by canada68 »

A blast from the past:

http://www.grasmick.com/board/?topic=topic2&msg=6242
The Rev. Proc indicates that distributions from plans which have benefitted from deferral, are indeed considered pension/annuities.

It is unclear that if one NEVER uses the rev proc, whether IRS will accept that the income from RRSP/LIRAs/RPP is NOT pension income (ie. is interest dividend or cap gains).

It is also unclear as to whether capital LOSSES incurred in such "un-Rev. Procd" plans could be used as normal capital losses.
The above great post (by nelson, natch) was written prior to the release of the 8891 I believe. In that form, checking 6c forces you to make an irrevocable election for all subsequent years. It seems rather clear that the intent of the treaty is that once you elect that an account is an RRSP, you can't then decide that it is not one.

In my particular case (because I took the internet bubble bath), it seems that the best thing that I should have done is not report the account as RRSP when I came here many years ago. Of course, if we could have predicted those bubbles, we wouldn't have had all those cap losses to begin with.

Therefore, I need to file the fake 1099-R, and take the (minimal) tax credits.
nelsona
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Location: Nowhere, man

Post by nelsona »

The election of Rev Proc 2002-23 has always been (and as indicated on 8891) irrevocable.

You would need to go back to IRS, hat in hand, and ask to adjust your previous returns (and your state returns) to undo any deferrals. They probably won't go for it.

And, remember, by treaty, the IRS WILL NOT have to give ANY credit for any Cdn tax paid by you to CRA on what you now call cap gains, since cap gains are US-sourced for US residents regardless if they are held by a Cdn mutual fund company or brokerage. This is the danger of treating your RRSP like an ordinary investment account IRS will also, and deny any Cdn tax credit (you could still use the deduction, though).

You should be using up your cap losses on your 1040 every year in any event, $3000 at a time, and forget about trying to apply them to your RRSP.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
Oliver
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Joined: Fri Nov 10, 2006 5:02 pm

Post by Oliver »

Isn't there a potentail advantage in having an RRSP treated like a brokerage account rather than a pension in that long-term capital gains are taxed at 15% instead of a higher marginal rate.

Based on previous topics it sounds like foreign tax credits are hard to fully utilize anyway.
nelsona
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Post by nelsona »

This is always an option, up until you invoke the treay.

However, for those who intend to go back to canada, this would mean having paid tax where none was due.

Also, for those intending to remain in US and only cash their RRSP at retirement, the deferral of taxation would likely far outweigh any lower cap gains taxrate.

But, for those who plan to collapse their RRSP within a couple of years of entering Us, this is a viable method.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
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