Dual Status Tax - doing something wrong?

CheapScotsman · Post by **CheapScotsman** » Fri Apr 15, 2005 1:57 pm

I lived in the states from 2001 to Feb 2004 as a alien resident. Moved back to Canada at end of Feb 2004. Doing a dual status tax return with a 1040 (resident alien) to cover jan/feb and a 1040NR (non-resident alien) to cover the rest ...

I've read Pub 519 and the 1040NR instruction manual and I just don't get it

First, the theory. In Pub 519, Pg 29 it says "for the part of the year that you were a resident alien, you are taxed on income from all sources" and "For the part of the year that you are a nonresident alien, you are taxed on income from US sources"

Second, the practice. Pub 519 gives a dual status example (first year) and shows copying income from 1040NR to 1040. Given I am final year, I assume I have to do the same in the other direction (copy from 1040 to 1040NR) ... but this ballons my NR income !!! I don't copy deductions or exemptions so this leaves me with tax that is a hundreds MORE than on my 1040 return ... Note that my NR wages/salaries is ZERO (dividends and capital gains only) ...

The theory says my NR tax should have been zero (before accounting for dividends and capital gains) but that is not what is happening

What am I doing wrong?

Thanks in advance ...

nelsona · Post by **nelsona** » Fri Apr 15, 2005 3:20 pm

You are not using the deductions and exemptions, which you are indeed still entitled to.

since you left US, you are a non-resident, thus your tax is CALCULATED on a 1040NR, which means no standard deduction, and married filing singly.

Only the deductions that are listed in the 1040NR instructions are available to you. And you should be using your spouse and childredn as exemptions, since they are Cdn residents.

But the tax rate will be much higher than for a regular 1040.

That is why it has been repeatedly suggested that one leaving US, should file a 1040, and exempting the Cdn wages earned after the move.

nelsona non grata... and non pro

CheapScotsman · Post by **CheapScotsman** » Fri Apr 15, 2005 4:21 pm

nelsona ... thanks for your assistance. Much appreciated. Wish I was better at this but dual status tax returns aren't done that often.
<hr noshade size="1">

I actually have done a 1040 as part of the dual status but I didn't copy my exemptions or deductions from the 1040 to the 1040NR (perhaps I should ???)

Instead I calculated the exemptions and deductions on the NR return itself. The sum of these on the NR is thousands less than on the 1040 ... there by increasing my tax by hundreds.

Given that my NR wages/income is zero (no cdn income), this doesn't match the theory ... leaving me quite confused.

CheapScotsman · Post by **CheapScotsman** » Fri Apr 15, 2005 4:22 pm

The biggest deduction that is missing off my 1040NR but is on my 1040 is my mortgage interest ... on the 1040 return it can be used to offset my resident wages ... but its not in the itemized deductions list on the 1040 NR therefore can't use it on my 1040NR even though I have hauled all my resident wages across ...

Am I doing this wrong?

Thanks in advance

nelsona · Post by **nelsona** » Sat Apr 16, 2005 6:10 pm

The best ways for you to file is:

A- married joint 1040 full year, exempting your and spouse's Cdn wages with 2555.

B- married filing singly full year 1040, exempting your Cdn wages.

nelsona non grata... and non pro

CheapScotsman · Post by **CheapScotsman** » Mon Apr 18, 2005 2:31 pm

okay ... so if I file 1040 (which is supposed to be full year) how do I exempt the 30K in US stocks I sold from my US broker at the end of the year (when I was a non-resident?)

nelsona · Post by **nelsona** » Mon Apr 18, 2005 2:50 pm

Unfortunately, you can't. By choosing 1040, You are choosing to be treated as a US citizen, so it's all or nothing. Yopu are only taxed on the gains however, not the entire $30K of course.

Either use 1040NR, with lousy tax rate but no Cdn income, nor post-departure cap gains, or 1040 with everything but Cdn wages.

If you were a green card holder, having to file a 1040, you could use the fact that that you are a GC holder but not a citizen, to exclude the cap gains triggered while resident in Canada, when you choose to be treated as a resident (because this is the only way you can file 1040) then you cannot avail yourself of a treaty right which you would otherwise have by virtue of being a resident of the other country.

Figure out which yields the lower US tax, and use this way.

if you do use 1040, you can still use any Cdn cap gains tax you paid on your transaction as a foreign tax credit. However, given that this tax would be based solely on the gains made after you arrived in Canada (by deemed acquisition rules) I presume the Cdn tax on your sale was miniscule.

A case of unfortunate timing I'm afraid. The same dilemma is faced by those moving to US and cashing in a lot of investments before moving to US but during the year of the move, and is one of the reasons most 'arrivees' dont use the 1040/2555 scheme for their first year in US.

If only you had waited a few weeks.[V]

nelsona non grata... and non pro

CheapScotsman · Post by **CheapScotsman** » Mon Apr 18, 2005 4:15 pm

Okay .. so can I not do dual status ... 1040 for the 1st two months (worldwide income) then 1040NR for the rest of the year (US based income only)?

If so, which deductions can I copy from my 1040 to my 1040NR ... example, do I just copy my mortgage interest deduction from the 1040 to the 1040NR ???

nelsona · Post by **nelsona** » Mon Apr 18, 2005 4:30 pm

As I said last week:
<blockquote id="quote">quote:<hr height="1" noshade id="quote">Only the deductions that are listed in the 1040NR instructions are available to you. And you should be using your spouse and children as exemptions, since they are Cdn residents<hr height="1" noshade id="quote"></blockquote id="quote">

The 1040 portion of your return will only be used for the INCOME reporting.

The deductions and exemptions are all determined by the 1040NR rules.

How much cap gains did you have anyways? Seems to me that, in the tax brackets we are talking about, you would need 10-12K of cap gains (maybe more) to make the 1040 option (with statndard deduction and joint filing) more costly than the 1040NR.

and with that much cap gains, a little more planning would have been in order regardless of whether this was a moving year or not.[:(]

nelsona non grata... and non pro

CheapScotsman · Post by **CheapScotsman** » Mon Apr 18, 2005 7:57 pm

<blockquote id="quote">quote:<hr height="1" noshade id="quote">Originally posted by nelsona

As I said last week:
<blockquote id="quote">quote:<hr height="1" noshade id="quote">Only the deductions that are listed in the 1040NR instructions are available to you. And you should be using your spouse and children as exemptions, since they are Cdn residents<hr height="1" noshade id="quote"></blockquote id="quote">

The 1040 portion of your return will only be used for the INCOME reporting.

The deductions and exemptions are all determined by the 1040NR rules.

<hr height="1" noshade id="quote"></blockquote id="quote">
Thanks for clarifying. Sure isn't apparent from reading the dual status section in Pub 591.

<blockquote id="quote">quote:<hr height="1" noshade id="quote">How much cap gains did you have anyways? Seems to me that, in the tax brackets we are talking about, you would need 10-12K of cap gains (maybe more) to make the 1040 option (with statndard deduction and joint filing) more costly than the 1040NR.<hr height="1" noshade id="quote"></blockquote id="quote">I had about US$8k in capital gains (as a non resident), US$5K in US mortgage interest (as a resident) and my wife had US$8K in income (as a non-resident). So I ran TaxCut with a married filing joint and filled out Frm 2555EZ; it won't let me exclude any of her income ... [xx(]

<blockquote id="quote">quote:<hr height="1" noshade id="quote">and with that much cap gains, a little more planning would have been in order regardless of whether this was a moving year or not.[:(]

nelsona non grata... and non pro
<hr height="1" noshade id="quote"></blockquote id="quote">ha ... 2 hours (as a favor) with the expat tax group at KMPG which handles hundreds of people a year like me for the multi-national that I used to work for ... this is what they told me I should do ... Of course, I could have PAID to get my exit tax return done but that would have eaten more than what I am trying to track down.

With your suggestions above, I think I know the approach I am going to take to finish this off.

Thanks again for all your help.

nelsona · Post by **nelsona** » Mon Apr 18, 2005 9:56 pm

There is no reason why your wife's Cdn wages cannot be excluded.

As soon as she meets the 330-day requirement she can exempt upto 10/12ths (the time in 2004 she was non-resident) of $80,000US

And if you do 1040, it doesn't matter where or when in 2004 the mortgage interst was paid. It can even be on your Cdn home.

Question: since you say you left US in Feb, $5000 of interest in 2 months is quite high, isn't it? At current interest rates that's about a $1,000,000 mortgage!! Just wondering.

nelsona non grata... and non pro

CheapScotsman · Post by **CheapScotsman** » Mon Apr 18, 2005 11:54 pm

Okay, it seems I can make form 2555 work and I could go the 1040 route. Let me rebuild my taxes using TaxCut adding in all the junk from my 1040NR and see if it works.

How do I inform the IRS that this is our last tax year? (such that we don't have to file a return in 2005 ???

ps ... we didn't have a mortgage quite that high but we were highly leveraged and paying a mortgage interest premium because, while our credit scores were very good, we had extremely little US credit history and a low downpayment (cause we kept our house (rented) in Canada)... seems to have translated into a higher mortgage rate.

nelsona · Post by **nelsona** » Wed Apr 20, 2005 10:51 am

I cannot fathom a mortgae rate that would yield $2500/mo INTEREST payment (not mortgage payment, INTEREST payment).

nelsona non grata... and non pro

CheapScotsman · Post by **CheapScotsman** » Wed Apr 20, 2005 4:15 pm

hmmm ... does seem a bit high but that is what they put on my 1098