1040 effective tax rate

rg1495 · Post by **rg1495** » Sat Mar 31, 2007 6:21 pm

Nelsona - See I am asking my question in a new thread :)...

I calculated my effective tax rate (line 37/line 21) using the 1040 pro-forma, claiming standard deductions for me and my wife and claimed 2 dependents (my parents since they live with me). My effective tax rate is coming to 9.5% which I applied to 1040 NR using Article XXV(4) line 58. Is 9.5% effective tax rate too low? Could they ask me to pay AMT since my tax rate is so low?....Am I paying less taxes?

Ofcourse, whatever I save in US taxes, I am offsetting by investing in RRSP's so that my net effective tax in Canada is minimal.

Is my understanding of the treaty correct or did I misinterpret something. I am a lil worried since this is the first time I plan to file using Article XXV(4)

I will really appreciate your help.

nelsona · Post by **nelsona** » Sat Mar 31, 2007 6:39 pm

The effective tax calculated on 1040 is line 63/line 37.

You would have accounted for AMT when you did the 1040. Did the softwrae ask for AMT? if it did not, then you will not have AMT on your 1040NR.

rg1495 · Post by **rg1495** » Tue Apr 03, 2007 12:03 pm

Thanks for your reply Nelsona. Once, I obtain the effective tax rate from 1040 (line 63/line 37), would I multiply that with the Ajusted Gross Income (line 36 on 1040 NR) to calculate the net tax (line 58 on 1040NR) ?

nelsona · Post by **nelsona** » Tue Apr 03, 2007 12:40 pm

Technically, the effective taxrate is only supposed to be used against the US WAGES that you report on 1040NR, so if you reported anything other than that, you would have to 'split' the tax into 2 parts, and only reduce the portion that applied to your wages.

Quick example: you report $90,000 in wages and $10,000 in other income on your 1040NR. You complete a pro forma 1040 joint return, reporting all world income and using deductions and come up with a 10% taxrate.

On your 1040NR, you come up with $12,000 in tax. $1200 is your tax on non-wage, $10,800 is your tax on wages. You would reduce your 'wage tax' to $9000, a reduction of $1800, so your 1040NR tax would be $10,200.

Remeber, the tax reduction applies only to wage income.

You would explain all this on your 8833 form.

rg1495 · Post by **rg1495** » Wed Apr 04, 2007 1:22 pm

Thank You. In form 8833, which one of these 2 options would I check?

- The taxpayer is disclosing a treaty-based return position as required by section 6114
- The taxpayer is a dual-resident taxpayer and is disclosing a treaty-based return position as required by Regulations section 301.7701(b)-7

I am a canadian resident. So, I think it is the first check box but just wanted to confirm.

It asks for the treating article - Is XXV (4) ok or should I just put XXV.

thanks

nelsona · Post by **nelsona** » Wed Apr 04, 2007 1:35 pm

The treaty article is XXV(4).

rg1495 · Post by **rg1495** » Mon Apr 09, 2007 7:55 pm

Sorry for the delay in respoding...got tied up over the holidays....what do I report on line 41 of 1040 NR - the tax based on 1040NR tables or the tax from the 1040 proforma ?

1040 NR line 58 - Do I show the net effective tax obtained by multiplying the gross annual income with the effective rate from 1040 proforma?

The problem is on 1040 NR, I can show the exemptions amout but there is no way to show the standard deduction amount.

Thanks for your help

nelsona · Post by **nelsona** » Mon Apr 09, 2007 9:54 pm

You only change one line on your 1040NR: line 58. You do this by LINING out the normal ammount, and indicatingb the revised ammount below it.

You don't change any of the other entries.

As I explained in the other thread about this process (just because I told you not to jump on that thread doesn't mean youi shouldn't read it), you multiply the effective rate from pro forma on your WAGES only.

So, if your 1040NR has 90% wages and 10% other income, you take 10% of what you normally come up with (line 58) plus your effective rate times your wages. You expalin this on your 8833.

There is an example in telly's thread.

rg1495 · Post by **rg1495** » Mon Apr 09, 2007 10:39 pm

All I have is a single source of income i.e. my US wages.....I don't have any canadian income (except my bank interests) which I presume I do not need to report on my US taxes. Wouldn't it be better if I just file 1040 instead of 1040NR ?...Would that be a problem with the IRS?

nelsona · Post by **nelsona** » Mon Apr 09, 2007 10:51 pm

Your Cdn interest is not reportable on 1040NR, but should be on your 1040 proforma, along with your wfe's income.

This only works if you and your spouse have other income. If you don't thaen just file a 1040 and be done with it.

Are you even married? Were you jerking me around, or what?

rg1495 · Post by **rg1495** » Mon Apr 09, 2007 11:07 pm

Yes I am married but my wife does not work. I respect your knowledge and recognize the value you bring to this forum. I wonder why you'd think that I was jerking around with you ? .....I am just getting my doubts resolved since this is the first time I am filing using Article XXV(4) or 1040 for that matter. I have always filed 1040NR and been paying excess taxes to the US Govt until I stumbled upon telly's post few weeks ago...anyways.....getting back to the main point.

I guess based on what you said, I should be just filing 1040 since we do not have any other income besides the W2 wages. Now the question is, why do I have to report my canadian bank interests on the 1040 ??......getting more confused.

nelsona · Post by **nelsona** » Tue Apr 10, 2007 7:44 am

he whole point of filing by XXV(4) is that you and your spouse have lots of other income than your US wage.

If you don't, then you don't need XXV(4), and just file a 1040 like anyone else.

rg1495 · Post by **rg1495** » Tue Apr 10, 2007 8:51 am

Great. Do I have to report the interest income I receive from my canadian bank accounts on 1040?.....If yes, could you explain why just so that I understand?

thanks a lot for your help.

nelsona · Post by **nelsona** » Tue Apr 10, 2007 10:02 am

When you use 1040, you report all world income. That is the law.

The treaty does not allow you to exempt interest from canada on a 1040.

Your interst is part of our worl;d income.

rg1495 · Post by **rg1495** » Tue Apr 10, 2007 4:10 pm

I have some joint canadian GIC's with my father which got some interest income. My father's name is also indicated on the T5 issued. Could he claim the interest as income on his taxes since he has a lower tax bracket (no income) or would I have to claim it on my taxes? .The money is mine but he is a joint account holder on the GIC's. If it is likely to raise a red flag then I will just add it to my 1040.

For a couple of grand of interest income, does it make sense to go the 1040NR route (since I would not have to report it on 1040NR) or should I pursue the 1040 route.

[quote]"So, if your 1040NR has 90% wages and 10% other income, you take 10% of what you normally come up with (line 58) plus your effective rate times your wages. You expalin this on your 8833"[/quote]

In your example above, is the 10% other income - US income or canadian income?