After reading and studying all the forms one thing has become very clear. Following example would clear it up. Hope my understanding is right on this matter.
Say as a Canadian citizen you made 30K until say July 07 and then for the rest of the year you make 40K in USA. (say USD:CAD=1:1) You are filling as a USA resident 1040. Canadian taxes are seperate and are filled taking std deduction as prorated until July 07.
The total income which includes both USA and CAD income in this case is say 70K. Individually on 40K USD (not showing the CAD income) the tax is very minimal. The moment you include the CAD income your grand total goes up to 70K in US and so is your tax bracket in USA.
I think its a myth that you are not double taxed. The fact that the tax bracket goes up because you are including CAD income into 1040 takes care of all the taxes. (This is just like interest income is treated on your marginal tax rate..somewhat...)
Total income from USA & Canada
Moderator: Mark T Serbinski CA CPA
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dhirenasha
- Posts: 57
- Joined: Fri Nov 23, 2007 9:31 am
- Location: USA
You are missing two things.
1. If you only include your US income, you cannot file a joint 1040 nor use the standard deduction. So your $40K income tax becomes quite a bit larger.
2. The premise behing including all income, including your foreign income, is that you then EXCLUDE the foreign income using 2555 or foreign tax crdits. This lowers your taxrate considerably, since you can now file joint, get the and standard deduction.
I have never suggested that including the foreign income merely to file 1040 was the best solution, reporting the income and then excluding IS the best solution -- especially if married, follwed by reporting the income and then using foreign tax credits is next.
Using your example: Reporting 40K and using the single table would yield 6430 in tax. Reporting 70K, and then excluding it (as married) would yield a tax (now on 60K when you take off the standard deduction) would be 8221. Using the foreign tax credit would remove about 3/7ths of this, so we are down to $4700 (you will have paid at least 3500 in Cdn tax). Using the exclusion would yiild similar results, and be much simpler.
Now, if you are single, the savings are not as drastic using the FTC, you would need to run the numbers on your own case. you may have sufficient deductions to to make up for losing the standard deduction, which would be unlikley if married.
In any event, when you but the softwar, you should always run all three cases.
Remember too, that if you spent vacation in US at the beginning of the year, you may not be able to exclude the Cdn income.
1. If you only include your US income, you cannot file a joint 1040 nor use the standard deduction. So your $40K income tax becomes quite a bit larger.
2. The premise behing including all income, including your foreign income, is that you then EXCLUDE the foreign income using 2555 or foreign tax crdits. This lowers your taxrate considerably, since you can now file joint, get the and standard deduction.
I have never suggested that including the foreign income merely to file 1040 was the best solution, reporting the income and then excluding IS the best solution -- especially if married, follwed by reporting the income and then using foreign tax credits is next.
Using your example: Reporting 40K and using the single table would yield 6430 in tax. Reporting 70K, and then excluding it (as married) would yield a tax (now on 60K when you take off the standard deduction) would be 8221. Using the foreign tax credit would remove about 3/7ths of this, so we are down to $4700 (you will have paid at least 3500 in Cdn tax). Using the exclusion would yiild similar results, and be much simpler.
Now, if you are single, the savings are not as drastic using the FTC, you would need to run the numbers on your own case. you may have sufficient deductions to to make up for losing the standard deduction, which would be unlikley if married.
In any event, when you but the softwar, you should always run all three cases.
Remember too, that if you spent vacation in US at the beginning of the year, you may not be able to exclude the Cdn income.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
"Remember too, that if you spent vacation in US at the beginning of the year, you may not be able to exclude the Cdn income."
By this I mean, you may not have the option on whether or not to REPORT the income, since your 'first day' in US may not be JUly but january. Then, you would have no choice but to report and then exclude it as I expalined.
By this I mean, you may not have the option on whether or not to REPORT the income, since your 'first day' in US may not be JUly but january. Then, you would have no choice but to report and then exclude it as I expalined.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best