Half year US, half year Canada tax resident?

bmozaffari · Post by **bmozaffari** » Fri Apr 28, 2006 12:18 pm

Hi,

I received my Green Card in April but will actually move from Canada to the US in June or July. Following the tiebreaker rules in the treaty, it's my understanding that I will remain a Canadian tax resident till the date I actually move, does that make sense?

Regardless of that, how is one taxed when he's only the resident of a country for part of the year? My understanding is that both the personal exemptions in Canada and the standard deduction in the US would be prorated, but the tax brackets would not, am I right? If so, my annual income of $100,000 would be taxed as 2 incomes of 50k, one in each country, and benefit from lower tax brackets (though not twice the deduction really)... that means I get a pretty good tax break on the year I move, am I right?

Thanks, Babak

nelsona · Post by **nelsona** » Fri Apr 28, 2006 1:14 pm

In canada, the personal exemption would be prorated.

In US, in you elect to be chosen to be a part year resident, you get NO standard deduction, you can only itemize, and if married must file separately, all of which make your US tax higher.

That is why it is almost always better to elect to be treated as a US resident for the whole year, for US tax purposes (this does not affect your part-year Cdn status). You will report all yor 2006 income, but ou can exempt the Cdn wages from before your entry into US.

bmozaffari · Post by **bmozaffari** » Fri Apr 28, 2006 1:21 pm

But what about the brackets? Correct me if I'm wrong, but I think brackets have an even higher impact, at least with an income of 100+k, since I'd be subjected to the brackets for income of 50 in both countries, right?

When I elect to be a resident for the whole year, does my pre-entry income get added and the Canadian taxes later returned as credits? That would push me into the higher brackets, and not be to my advantage, isn't it? Also, if I obtained the GC in April but moved in July, would July still be the entry date, as I would continue to pay Canadian taxes through July as a resident of Canada per the treaty?

Finally, i have heard that it's best to have the same accountant file both CDN and US taxes in cases like mine, any recommendations (do you do it?)

nelsona · Post by **nelsona** » Fri Apr 28, 2006 1:39 pm

As I said, if you are single, you brackets will not change for part-year, but if married, part-year residents get dinged quite heavily, thus the need for filing full-year.

When you exempt the income using 2555, it is removed 'off the top' so you will get full benefit in US.

But, in the long run, the earlier you move to US the less that you will pay.
every $ you earn while living in canada will be taxed at a higher rate that if it was earned while living and working in US.

You would have to have left at about the $30,000 mark to really get a break, as your Cdn income would have been in the lowest bracket. Even the highest US bracket is lower than the second Cdn bracket, depending on which state you live.

By the way, if you are going to continue working in Canada, then you will pay Cdn tax rate on your wages. You didn't say where this steady stream of income is coming from, most people moving to US, change employers and get a HEFTY raise.

Your departure date from canada will be July. It's not a a treaty issue.

if for one year, you were going to make a large income, then *maybe* this would have some impact (you would have been advised to 'push off' some income form 2005 to 2006, or from 2007 to 2006). But if your income is not changing, then you will proably still end up paying less overall tax in 2006 than you did in 2005, but more than you will in 2007.

bmozaffari · Post by **bmozaffari** » Fri Apr 28, 2006 2:17 pm

Thanks for the reply.

Everyone always says that you make more money in the uS and pay less taxes. I too have always taken it for granted that it's the case, but have so far been proven wrong on both counts!

I work for a tech company here and will move to California, either staying with the same company there or getting a different job. I make over $100k a year and have had phone interviews with So. Cal companies, it looks like I can't make a cent more there than I already make here (I'm not applying a currency conversion rate, that wouldn't be fair comparison, besides it's only 1.11 now!).

As for taxes, I used a paycheck calculator to compare, assuming that I wouldn't have any particular deductions (not buying a home, etc.). The total deductions in California turned out to be higher than mine in Ontario. Below is the deduction table I get from some website for California-2006 (http://www.paycheckcity.com/NetPayCalc/ ... ulator.asp), which totals
35%. I find that surprising, specially since the total deductions are only
31.5% for Toronto/Ontario. (
http://www.yourmoneypage.com/withhold/c ... vings1.y=5
)

Annual Gross Pay
$100,000.00

Federal Withholding
$20,889.50

Social Security
$5,840.40

Medicare
$1,450.00

California
$6,879.22

Net Pay
$64,940.88

If you can shed any light on this, or tell me if I'm missing anything, I'd appreciate it!

Thanks, Babak

nelsona · Post by **nelsona** » Fri Apr 28, 2006 2:42 pm

Unfortunately, you are moving to the highest taxed state from the lowest taxed province. you will pay more tax. And your cost of living will be exorbitant. Add to this your medical costs.

I would not be making the move to US (esp. Cali) at this time, but you have to, or forfeit your GC. too bad...

But your home will appreciate $500,000 in the next 15 years... you MUST buy a home. this will get you HUGE deduction.

bmozaffari · Post by **bmozaffari** » Fri Apr 28, 2006 4:47 pm

Right, I thought that may have something to do with it! You are absolutely correct about the GC dillema, that's my #1 reason for moving today. But I'm curious, when you say you would not move at this time... when would you move? Cause the issue seems to be my destination state, not the time...

In fact, going back to my original question, am I not getting a big tax break because I'm moving in the middle of the year, and avoiding the higher brackets in both countries?

bmozaffari · Post by **bmozaffari** » Sun Apr 30, 2006 12:13 am

I was just going through the tax guide on the IRS site and came across the following:

If you are a dual-status alien, you can choose to be treated as a U.S. resident for the entire year if all of the following apply.

* You were a nonresident alien at the beginning of the year.
* You are a resident alien or U.S. citizen at the end of the year.
* You are married to a U.S. citizen or resident alien at the end of the year.
* Your spouse joins you in making the choice.

I'm single, then how can I elect to be treated as a US resident for the whole year?

Also if I may ask, do you represent the site owner (Serbinski firm)?

nelsona wrote:In canada, the personal exemption would be prorated.

In US, in you elect to be chosen to be a part year resident, you get NO standard deduction, you can only itemize, and if married must file separately, all of which make your US tax higher.

That is why it is almost always better to elect to be treated as a US resident for the whole year, for US tax purposes (this does not affect your part-year Cdn status). You will report all yor 2006 income, but ou can exempt the Cdn wages from before your entry into US.

nelsona · Post by **nelsona** » Sun Apr 30, 2006 12:24 am

Your Cdn citizenship entitled you to non-discrimination. A US citizen, moving from Canad to US is entitled (in fact MUST) file a 1040, and can use 2555 to exclude his pre-arrival wages -- thus so can you.

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