Hi All
I will use 1040 to file my 2006 return.
Can I use 2555 to exclude interest income from Canada?
The interest had no tax withholding from Canada bank.
If not, I still need to report to both CRA and IRS.
It looks that leads to double taxation, right?
Please clarify for me.
Thanks in advance.
Allen
Can interest from Canada be excluded using 2555?
Moderator: Mark T Serbinski CA CPA
Thanks a lot, Nelsona for the reply.
But my confusion is still there.
(Suppose I claim FEIE for my Canadian wages for IRS filing.)
For my case, I got interest from Canadain bank before and after
I came to the US.
Should I report the interest to IRS in 1116?
Since there is not tax withholding on it, there will be no credit for it.
But IRS would tax on it anyway.
But I still need to report it to CRA as part of Canadian income,
then it will be taxed again.
It will lead to doubel taxation, right?
Thanks again for any insight or ideas.
But my confusion is still there.
(Suppose I claim FEIE for my Canadian wages for IRS filing.)
For my case, I got interest from Canadain bank before and after
I came to the US.
Should I report the interest to IRS in 1116?
Since there is not tax withholding on it, there will be no credit for it.
But IRS would tax on it anyway.
But I still need to report it to CRA as part of Canadian income,
then it will be taxed again.
It will lead to doubel taxation, right?
Thanks again for any insight or ideas.
When you file a 1040, you must report and pay tax on your WORLDWIDE income for the entire year. All of it.
You can exclude Cdn wages (and only those earned before the move, by the way) with 2555. All other income must be reported, with tax due. you could have simply chosen to repoert the wages and use the Cdn tax as a credit on 1116.
The interest you made before the move WILL be taxed in canada -- on your 2006 Cdn tax return. It will be proportional to the tax you paid on all the other income you reported on your Cdn tax return.
The Cdn interest you made AFTER leaving US, has been taxed at 10%. It is not to be reported on your Cdn tax return.
For US, you will report all the interest, and the tax credit you can claim will be the proportion of Cdn tax that was for the interst reported on your Cdn return, plus the 10% that was withheld on the interst after you became a US resident.
This same scenario applies to all other income that needs to be reported in both countries, other than your excluded wages: dividends, interst, capital gains, UI, etc.
You can exclude Cdn wages (and only those earned before the move, by the way) with 2555. All other income must be reported, with tax due. you could have simply chosen to repoert the wages and use the Cdn tax as a credit on 1116.
The interest you made before the move WILL be taxed in canada -- on your 2006 Cdn tax return. It will be proportional to the tax you paid on all the other income you reported on your Cdn tax return.
The Cdn interest you made AFTER leaving US, has been taxed at 10%. It is not to be reported on your Cdn tax return.
For US, you will report all the interest, and the tax credit you can claim will be the proportion of Cdn tax that was for the interst reported on your Cdn return, plus the 10% that was withheld on the interst after you became a US resident.
This same scenario applies to all other income that needs to be reported in both countries, other than your excluded wages: dividends, interst, capital gains, UI, etc.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing 
Sorry to revisit this topic.
But I think I would bring up a valuable discussion about how to deal with
the interest obtained from Canada.
Many people moved down to US in the middle of a year.
Before the move, he/she would get some interest from Canadian bank,
where no tax withholding happened since he/she was Canadain resident.
After the move to US, he/she would be resident-alien for US tax purpose.
The interest must be reported to IRS, since it's world-wide income.
The same interest must be reported to CRA as well, since it's income from Canada.
It definitely leads to double taxation. (Correct me if I am wrong)
FTC can not be used to this case, since there is no tax withholding on it.
No matter how hard you run 1116, you can not make up any credit.
2555 will not be used to cover this interest, since it's been instructed so.
THEN the same amount would be taxed by IRS and CRA.
Anyone has idea to avoid this? Please share.
Thanks in advance.
Allen
But I think I would bring up a valuable discussion about how to deal with
the interest obtained from Canada.
Many people moved down to US in the middle of a year.
Before the move, he/she would get some interest from Canadian bank,
where no tax withholding happened since he/she was Canadain resident.
After the move to US, he/she would be resident-alien for US tax purpose.
The interest must be reported to IRS, since it's world-wide income.
The same interest must be reported to CRA as well, since it's income from Canada.
It definitely leads to double taxation. (Correct me if I am wrong)
FTC can not be used to this case, since there is no tax withholding on it.
No matter how hard you run 1116, you can not make up any credit.
2555 will not be used to cover this interest, since it's been instructed so.
THEN the same amount would be taxed by IRS and CRA.
Anyone has idea to avoid this? Please share.
Thanks in advance.
Allen
allen, did you complete your Cdn taxreturn? On it you will find all sorts of income,wages, cap gains, dividends, UI, rental and interst.
ALL these incomes are reportable in US/ All of these were taxable in canada too. You DID pay Cdn tax on your interest: it's part of the total tax you paid on your Cdn return.
Since only wages can be exempted by 2555, all other income must be treated with 1116. Many US filers use 1116 exclusively, especially since 20006, as it can lowers US taxes more than 2555.
So, if your final CDn tax bill was $5000 on your departure return and 5% of your reported income was interest, $250 of that tax can be used for the credit. That (plus your NR tax) is what you use on 1116.
FTC does not apply only to tax withheld, it also applies to tax accrued.
Does it result in a 'little' more tax to US? Probably, that's why filing full-year is an OPTION in your first year, But i think you'll find that the standard deuction which you lose by not filing full-year more than makes up for it.
In genaral, though, unless your Cdn tax rate is about 5-10%, you will end up not being able to use all your Cdn tax on 1116 for a specific type of income, and still owe in US. Cdns usually caryforwrd unused Cdn tax for several years on 1116, since the taxthey pay in canada is still more than the effective rate in US.
ALL these incomes are reportable in US/ All of these were taxable in canada too. You DID pay Cdn tax on your interest: it's part of the total tax you paid on your Cdn return.
Since only wages can be exempted by 2555, all other income must be treated with 1116. Many US filers use 1116 exclusively, especially since 20006, as it can lowers US taxes more than 2555.
So, if your final CDn tax bill was $5000 on your departure return and 5% of your reported income was interest, $250 of that tax can be used for the credit. That (plus your NR tax) is what you use on 1116.
FTC does not apply only to tax withheld, it also applies to tax accrued.
Does it result in a 'little' more tax to US? Probably, that's why filing full-year is an OPTION in your first year, But i think you'll find that the standard deuction which you lose by not filing full-year more than makes up for it.
In genaral, though, unless your Cdn tax rate is about 5-10%, you will end up not being able to use all your Cdn tax on 1116 for a specific type of income, and still owe in US. Cdns usually caryforwrd unused Cdn tax for several years on 1116, since the taxthey pay in canada is still more than the effective rate in US.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing