RRSP and the US foreign tax credit

eortlund · Post by **eortlund** » Fri Aug 10, 2007 8:21 pm

Now that my husband has an RRSP, is there a danger that it will reduce our Canadian income tax in such a way that will affect the foreign tax credit? My understanding is that I need to be sure the tax we pay in Canada is equal or greater than what we would pay on the same income in the US.

nelsona · Post by **nelsona** » Fri Aug 10, 2007 8:55 pm

Well, you should always be trying to reduce your taxes.

Many Cdns (usually those who also pay state tax) do reduce their Cdn tax below that of US.

The remedy is to contribute to your RRSP, but only claim the deduction such that it 'evens out' the tax, and carrying forward the unused deduction,

But since you don't pay state tax or FICA at this point, and you still have US-only deductions like mortgage deduction, I would not be worrying that you will lower your Cdn taxes 'too much'.

eortlund · Post by **eortlund** » Fri Aug 10, 2007 9:46 pm

Wait! Are you saying that as an American who owns a house in Canada, I can claim a mortgage interest tax deduction on my US taxes?

nelsona · Post by **nelsona** » Fri Aug 10, 2007 11:01 pm

sure, even an American in US can claim the deduction on a Cdn house.

This isn't a big issue, since you aren't taxable in US anyways, and you would need to itemize, but mortgage interst and real estate taxes are deductible like any US home. IRS doesn't genearally care about where the deduction was incurred, since you are taxable worldwide.

eortlund · Post by **eortlund** » Sat Aug 11, 2007 10:37 am

How likely do you think it is we could qualify for the mortage deduction, and would it yield us a refund on our taxes, like the child tax credit? Our income is quite moderate, but we did just buy the house so the bulk of our payments are interest.

nelsona · Post by **nelsona** » Mon Aug 13, 2007 3:35 am

You qualify for mortgage interest deduction.

The questions are, does this deduction, added up with others, exceed your standard deduction, and more importantly, will this reduce your US tax.

Very likely you do not pay any US tax right now. You should be getting ALL of the child tax credit back. The child tax credit is special in that it is 100% refundable even if you owe no tax. Most other credits/deductions only reduce your net tax to ZERO. That is why all CDns, 3 years ago switched to FTC method to get that child tax credit.

The point of this discussion is to highlight that, in the course of time, you *might* at some point have a situation where your US tax burden may exceed your Cdn one, and that at that point you would be looking for some US-only tax relief measures, like mortgage interest and property tax.

But since you currentlty pay no state taxes, and no FICA, I cannot envision a situation, even by maxxing your RRSPs, where your US tax would become a concern.