my family moved to US in May 2004. Our income is quite simple, in the first half of year, we only have canadian income; in the second half of year, we only have US income. The canadina income is almost the same as our US income (my wife only works 1 month in US).
I did the math on MSJ, there are $5000 Canadian tax couldn't be used as this year's foreign tax credit, is this normal? can we use it next year as carryover? Do you think we'll benefit to file MFS by using 1040NR/1040?
second question: if we choose to file as full year US resident, will the state tax be calculated as full year as well? I think I have to.
Nelson - need your help
Moderator: Mark T Serbinski CA CPA
Filing MFJ, (and including your Cdn income form the beginning of the year) will always yeild (a) US tax on your Cdn income and (b) inability to use up all the Cdn tax as a foreign tax credit.
Using round numbers, if you are adding $25K of Cdn income to your 1040, you are probably getting charged $5K in US tax, and you are only being allowed to claim $1500 in Cdn tax as a credit, regardless of how much CDn tax you paid.
That is <u>always</u> the problem with foreign income on 1040 and the limits on foreign tax credits.
Unless you have substantial Cdn wages or RRSP income in the next 5 years, and that these wages are somehow not taxes in canada (unlikely), you will end up losing those Cdn taxes.
Your best option is to use the full year MFJ 1040, but to exclude your Cdn wages, by the Foreign Earned Income exclusion (Form 2555) and then not have to worry about the Cdn tax credit for your wages. This option does require you to take a treaty position (Form 8833), and only covers Cdn <u>wages</u>, not any other Cdn income you might have had.
The simplest way would be to file 1040NR/1040 MFS, but I suspect that this will yield a much higher US tax than the way you've done them now), especially that neither of you will be entitled to the standard deduction, and that your 2 incomes are not comparable.
As to your state taxes, all states have special tax forms which deal with part-year residents. On these you typically only report the income that was earned in your state or while resident of your state. Many use these returns (not just new US residents) in years when they move from one state to another.
<i>nelsona non grata</i>
P.S. I trust that you have done your Cdn taxes correctly, reporting no US income, and a departure date of May 2004 (adjusting your credits accordingly per the CRA 'Emigrants' guide) and notifying any cdn payors of your non-res status.
Using round numbers, if you are adding $25K of Cdn income to your 1040, you are probably getting charged $5K in US tax, and you are only being allowed to claim $1500 in Cdn tax as a credit, regardless of how much CDn tax you paid.
That is <u>always</u> the problem with foreign income on 1040 and the limits on foreign tax credits.
Unless you have substantial Cdn wages or RRSP income in the next 5 years, and that these wages are somehow not taxes in canada (unlikely), you will end up losing those Cdn taxes.
Your best option is to use the full year MFJ 1040, but to exclude your Cdn wages, by the Foreign Earned Income exclusion (Form 2555) and then not have to worry about the Cdn tax credit for your wages. This option does require you to take a treaty position (Form 8833), and only covers Cdn <u>wages</u>, not any other Cdn income you might have had.
The simplest way would be to file 1040NR/1040 MFS, but I suspect that this will yield a much higher US tax than the way you've done them now), especially that neither of you will be entitled to the standard deduction, and that your 2 incomes are not comparable.
As to your state taxes, all states have special tax forms which deal with part-year residents. On these you typically only report the income that was earned in your state or while resident of your state. Many use these returns (not just new US residents) in years when they move from one state to another.
<i>nelsona non grata</i>
P.S. I trust that you have done your Cdn taxes correctly, reporting no US income, and a departure date of May 2004 (adjusting your credits accordingly per the CRA 'Emigrants' guide) and notifying any cdn payors of your non-res status.
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bhand11683
- Posts: 11
- Joined: Tue Nov 16, 2004 12:46 pm
bhand, yes, if you are <u>not</u> a US citizen or Green Card holder, you can submit a 1040, using FEIE (if you meet the standard) to exclude your Cdn <u>wages</u> from your 1040, but including everything else and see if this is less US tax than filing a 1040NR with only the US income.
Or, if your US income was mostly wages, you could file an Article XXV return, which would in essence allow you to file a 1040NR (MFS), but pay tax at a rate of a 1040 MFJ. This is described in the treaty, and does not apply to income other tahn wages/contractor income.
If you are a US citizen, you can't choose any option but the 1040/FEIE option.
<i>nelsona non grata</i>
Or, if your US income was mostly wages, you could file an Article XXV return, which would in essence allow you to file a 1040NR (MFS), but pay tax at a rate of a 1040 MFJ. This is described in the treaty, and does not apply to income other tahn wages/contractor income.
If you are a US citizen, you can't choose any option but the 1040/FEIE option.
<i>nelsona non grata</i>
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bhand11683
- Posts: 11
- Joined: Tue Nov 16, 2004 12:46 pm
Thanks for your replies guys. Let me explain our situation
We are Indian Citizens, Cdn PR's live in Vancouver. My wife works in vancouver and hence has all cdn Income (wages + Bank interest on savings) and I have all American Income (wages + bank Interest) on H1-B visa. I have a Lot of unclaimed contributed RRSP for this year. The options I believe we have are
1) MFJ to minimise US taxes and then file T1's for each of us taking foreign tax credit for us on our cdn returns.
-My qns here is My wife will not be able to take all her cdn tax as a foreign tax credit on US return and may have to pay tax in US on her cdn income which we will not be able to claim back on her T1. So it is like paying xtra tax on her cdn income. Did I get it right here
2) MFS for me and T1 for her but I have a lot of unclaimed RRSP that I want to claim this year. MFS with no RRSP claim makes me equal to my cdn taxes on my income which I do not want to do.
So how can I use the treaty or Artcile XXV to get the best out of this situation. The thing I am looking at is MFJ rate for us taking all cdn tax paid as Foreign tax credit for my wife in canada and reducing our US taxes to minimum.
and then claiming all RRSP I have with foreign tax credit for US taxes paid on T1.
Hope I made sense here.
We are Indian Citizens, Cdn PR's live in Vancouver. My wife works in vancouver and hence has all cdn Income (wages + Bank interest on savings) and I have all American Income (wages + bank Interest) on H1-B visa. I have a Lot of unclaimed contributed RRSP for this year. The options I believe we have are
1) MFJ to minimise US taxes and then file T1's for each of us taking foreign tax credit for us on our cdn returns.
-My qns here is My wife will not be able to take all her cdn tax as a foreign tax credit on US return and may have to pay tax in US on her cdn income which we will not be able to claim back on her T1. So it is like paying xtra tax on her cdn income. Did I get it right here
2) MFS for me and T1 for her but I have a lot of unclaimed RRSP that I want to claim this year. MFS with no RRSP claim makes me equal to my cdn taxes on my income which I do not want to do.
So how can I use the treaty or Artcile XXV to get the best out of this situation. The thing I am looking at is MFJ rate for us taking all cdn tax paid as Foreign tax credit for my wife in canada and reducing our US taxes to minimum.
and then claiming all RRSP I have with foreign tax credit for US taxes paid on T1.
Hope I made sense here.
Actually, bhand, this changes things quite a bit, since the non-discrim treaty in the CDN/US treaty applies to CDns and US citizens (except for para. 4, which is the 1040NR at 1040 MFJ rates).
So, unless you actually met SPT, or if the Indian/US treaty has similar wording (and doesn't restrict you to living in India or US) you can't file MFJ 1040.
But just to clarify what you are saying, your wife is not entitled to take any foreign tax credit on her T1, since none of her income is foreign (it's all Cdn).
You are not entitled to take a foreign tax credit on 1040 for your US-based income, since it is US-sourced.
So, the very best you could do with 1040 MFJ adding your wife's income and her Cdn taxes as a credit. Compare this to a 1040NR with only your H1 income.
The XXV.4 return is probably the one that will yeild the least tax, since it will only tax your US wages, and will be at a preferencial rate.
You will then use this final tax (along with SS and medicare tax, and any stae tax) toward your foreign tax credit, on your return (not wife's).
I would then play arround with the RRSP dedcutions to see how much to deduct to reduce my Cdn tax to no less than zero, if you have that much RRSP contribs.
<i>nelsona non grata</i>
So, unless you actually met SPT, or if the Indian/US treaty has similar wording (and doesn't restrict you to living in India or US) you can't file MFJ 1040.
But just to clarify what you are saying, your wife is not entitled to take any foreign tax credit on her T1, since none of her income is foreign (it's all Cdn).
You are not entitled to take a foreign tax credit on 1040 for your US-based income, since it is US-sourced.
So, the very best you could do with 1040 MFJ adding your wife's income and her Cdn taxes as a credit. Compare this to a 1040NR with only your H1 income.
The XXV.4 return is probably the one that will yeild the least tax, since it will only tax your US wages, and will be at a preferencial rate.
You will then use this final tax (along with SS and medicare tax, and any stae tax) toward your foreign tax credit, on your return (not wife's).
I would then play arround with the RRSP dedcutions to see how much to deduct to reduce my Cdn tax to no less than zero, if you have that much RRSP contribs.
<i>nelsona non grata</i>
My wife and I are both Canadian citizen, and we have confirmed with CRA that we are NR since May 2004.
Nelson, as you said, 2555 only excludes canadian wages, I understand we still have to report other incomes(in my case, bank interest only) as worldwide income on 1040, can we still use this portion of canadian tax as foreigh tax credit? Or simplely put this way, 2555+MSJ is just like a regular MSJ with canadian wages excluded.
A friend of mine has similar situration as us, the only difference is that his wife still has mat EI after they moved to US. I asked a question here for them - when they use 2555 and MSJ, they have to report EI income as well.
Nelson, as you said, 2555 only excludes canadian wages, I understand we still have to report other incomes(in my case, bank interest only) as worldwide income on 1040, can we still use this portion of canadian tax as foreigh tax credit? Or simplely put this way, 2555+MSJ is just like a regular MSJ with canadian wages excluded.
A friend of mine has similar situration as us, the only difference is that his wife still has mat EI after they moved to US. I asked a question here for them - when they use 2555 and MSJ, they have to report EI income as well.
Sean, yes you can include the portion of your overall tax as it pertains to bank interest.
This would be a straight ratio: If you had $50K of Cdn income of which $500 was interest, 1% of your Cdn taxes would be includable (this is passive income on the 1116 form).
EI income is not earned income and is viewed like 'pension' income and must be included on MFJ and can't be excluded by 2555.
You keep typing MSJ. I suppose you mean M<b>F</b>J (Married fling jointly), as opposed to MFS, which means married filing separately.
<i>nelsona non grata</i>
Just a PS on maternity EI after leaving. For Cdn taxes, that income is subject to 25% NR tax only, and not to be included on her departure return, unless she wishes to include it under a 217 return (if she had little or no US income after leaving)
This would be a straight ratio: If you had $50K of Cdn income of which $500 was interest, 1% of your Cdn taxes would be includable (this is passive income on the 1116 form).
EI income is not earned income and is viewed like 'pension' income and must be included on MFJ and can't be excluded by 2555.
You keep typing MSJ. I suppose you mean M<b>F</b>J (Married fling jointly), as opposed to MFS, which means married filing separately.
<i>nelsona non grata</i>
Just a PS on maternity EI after leaving. For Cdn taxes, that income is subject to 25% NR tax only, and not to be included on her departure return, unless she wishes to include it under a 217 return (if she had little or no US income after leaving)
I did mean MFJ. I just bought TurboTax the past weekend and started to play around. In the past 3 days, I have read through most of the articles in this forum, quite confused(ing) with all the section/article/form/treaty 
.
It's a great site, experts like Nelson can really make a difference. Thanks Nelson, thanks Rene.
. It's a great site, experts like Nelson can really make a difference. Thanks Nelson, thanks Rene.