Moved from Canada to the US in May, Wife moved in June

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clank
Posts: 4
Joined: Wed Apr 08, 2020 7:36 pm

Moved from Canada to the US in May, Wife moved in June

Post by clank »

Hi,

I'm filing dual-status taxes for the first time and I am getting conflicting advice from an accountant that I hired and a big tax firm that I can get consultations with. I've read through many of the threads here and am really thankful for Nelsona for all the great advice he provides. The advice here has really allowed me to ask the right questions to minimize my tax burden!

Just some facts
* Married - Lived in Canada previously as Canadian citizens
* Moved to US in May to start a job
* Wife moved in June
* Fortunate to have about ~140K CAD in unrealized capital gains in stock market
* Had property appreciation of about 300K on my primary residence. Turned my primary residence into a rental when I left. No other property
* There is income disparity between my wife and I were income splitting would be beneficial

The biggest question I had was around capital gains. Since I meet the substantial presence test in the U.S., I believe I need to file a full year tax return. This would mean that I would need to filed MFJ but would get course get the standard deduction and also get the benefit of splitting the wages across my wife and I.

The area where I've gotten conflicting advice is how the step up basis works and the date that I start US residency. For Canada, on the day that I left canada, I'm calculating the exit tax (deemed disposition on my stocks and property). I haven't sold most of that stock yet and am still holding it. I've gotten conflicting advice on whether the deemed disposition here should be reported on my U.S. tax returns as capital gains if I file form 8833 to do the step up basis. This would also affect my decision of whether or not to step up the property I own since I owe 0 capital gains in Canada since it was my primary residence.

The accountants I've asked have given varying answers from
1) Yes, you would need to report the step up as long term capital gains but you would get a tax credit for the taxes you paid in Canada.
2) No, you would not need to report that as long term capital gains, but the step up basis would be as of January 1

I'm pretty confused about it and while right now I intend to move back to Canada in a few years making this point moot If I hold onto the asset (since there's no exit tax in the US), life is pretty unpredictable and I may need to sell the asset or perhaps stay longer that I had originally intended.

The second question I had was, it appears on the forum that I should be eligible for for 2555 to exclude income. One accountant says that yes that is the case while the other says you must use form 1116 to just get back the tax credits in Canada. I understand that for the month that I was in the U.S. i'd have to use Form 1116 since my wife worked an extra 3 weeks in Canada while I was working in the U.S. but wanted to get clarification for the rest of the time (Jan- May) whether or not I could choose to use form 2555 vs form 1116 depending on which one was more beneficial. The accountant that said it was fine to use form 2555 did mention that for high tax countries like canada form 1116 often is more beneficial anyways because they changed the calculation to exclude the bottom part of the income, but wanted to understand if it was even possible so I could do the math.

Thanks,
nelsona
Posts: 18314
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Re: Moved from Canada to the US in May, Wife moved in June

Post by nelsona »

Pretty long question, so I will only give brief answer. You are allowed to file a 1040 full year along with spouse. Her period for using 2555 can be different from yours, so both of you can exclude all of your Cdn wages on 2555, regardless of your different arrival dates.
Your cap gains, since they are subject to deemed disposition when you left, are also protected from double taxation in US, by filing a rev proc 2010-19. Discussed many times on this site. Happy browsing.
Your house is also protected from US cap gains by a different traty provision, so no worries. No need to step up value.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
nelsona
Posts: 18314
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Re: Moved from Canada to the US in May, Wife moved in June

Post by nelsona »

Any time you use 2555, you should of course try 1116 as well to see which is better. You will need 1116 on all other Cdn income other than wages.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
clank
Posts: 4
Joined: Wed Apr 08, 2020 7:36 pm

Re: Moved from Canada to the US in May, Wife moved in June

Post by clank »

Thank you so much! Now I understand proc 2010-19. Very very helpful!

For the physical real estate, just curious what provision in the treaty covers this? Is there any downside to using form 8833 to bump up the cost of the property or would that create more confusion?
nelsona
Posts: 18314
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Re: Moved from Canada to the US in May, Wife moved in June

Post by nelsona »

You are not using 8833 to bump up cost, you are using Rev Proc 2010-19, and filng the statement on 8833. There is no downside, you simply follow the rules of the rev proc. It applies to all investments which you deemed disposed on departure, which would not include your home.

Not sure about your other question. If you mean what covers your principal residence, that would be Article XIII.6, which AUTOMATICALLY bumps up its value. So be sure to have a reliable FMV evaluation of your former for future sale purpose, as well as for depreciation, which must be taken in US on rental property.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
clank
Posts: 4
Joined: Wed Apr 08, 2020 7:36 pm

Re: Moved from Canada to the US in May, Wife moved in June

Post by clank »

Thank you so much! there's literally way more clarity and guidance from you than the half dozen accounts i've paid to speak with so far :P
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