Hello. I am an American citizen, living in Canada since 1994 as a Landed Immigrant. I work for a Canadian company (and have since 1994), own a house in Canada and am married to a Canadian citizen. Since moving to Canada, I have been using Form 2555 and the Physical Presence Test (PPT) to exclude my Canadian income (i.e. all wages) from US taxes - I have never made more than the exclusion limit and so have never need to worry about the Foreign Tax Credit (FTC). Indeed I've read the instructions for the FTC several times and am quite unclear about how to use it, or when to use it (I find IRS lingo particularly difficult to parse).
This year I have spent a significant amount of time in the US, working for my Canadian company at an American subcontractor (on the order of 2 months total for 2006). I believe that this exposes approx. 1/6 of my Canadian income to US tax under the PPT option on Form 2555 (Correct?).
My questions:
1) Does the fact that I am working for a Canadian company affect my ability to exclude Canadian wages using the PPT? Or is that what the bona fide option is for?
2) Can I change my exclusion type from Physical Presence to Bona Fide resident on my Form 2555 and still exclude 100% of my Canadian income? The "bona fide" approach has always seemed more subjective (and therefore open to unpleasant interpretation) which is why I opted for the PPT originally. Are there any drawbacks to doing this?
3) If I can't do #2, is my only option still use the PPT to exclude 10 mo. income and use the Foreign Tax Credit to reduce the tax on the 2 mo salary I can't exclude on the 2555? I certainly paid Canadian taxes on this income through the normal Canadian tax witholding process.
4) Are there other strategies for this situation that I'm missing?
Any assistance would be greatly appreciated.
Thanks,
Glenn Hawkins
Richmond, BC
Form 2555 - which test to use?
Moderator: Mark T Serbinski CA CPA
Form 2555 - which test to use?
There is no such thing as a stupid question, but if you turn off your brain before asking questions don't expect other people to fumble around in the dark trying to figure out what you need.
First off , I should warn you that the FEIE has become a whole lot less attractive as a result of 2006 legislation that effectively turns the exclusion into a credit, so much so that many are going to opt for FTC this year.
second, if you have kids, you should have been using the ftc for the past 3 years in order to collect the $1000/child credit.
That said, it doesn't matter which criteria you opt for, the money earned while in US can't be excluded. But, The other wages will be excluded on 2555 by bone fide resident criteria.
As I alluded to however, now you will be forced to use FTc for all your foreign income, since you no longer get your standard deduction and exemptions tax-free. This is known as theanti-stacking provisions, and are going to drastically alter how US citizens file their 1040 from abroad.
second, if you have kids, you should have been using the ftc for the past 3 years in order to collect the $1000/child credit.
That said, it doesn't matter which criteria you opt for, the money earned while in US can't be excluded. But, The other wages will be excluded on 2555 by bone fide resident criteria.
As I alluded to however, now you will be forced to use FTc for all your foreign income, since you no longer get your standard deduction and exemptions tax-free. This is known as theanti-stacking provisions, and are going to drastically alter how US citizens file their 1040 from abroad.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing 