Effective Tax Rate

WindsorON · Post by **WindsorON** » Mon Jan 26, 2009 12:57 pm

Hi. Both my husband and I are Canadian Citizens working at US. I will choose Pro Forma 1040 for XXV(4) calculation method to file my 2008 tax return. One question is how to calculate effective tax rate. Is it 1) tax (line 44 on 1040)/Adjusted Gross Income (line 37) OR 2) tax (line 44 on 1040)/Taxable Income (line 43) ? Thank you very much!

nelsona · Post by **nelsona** » Mon Jan 26, 2009 1:19 pm

According to the technical explanation, it is #2: line 43/line 44.

Note that your pro forma cannot use the standard deduction, you must itemize.
Also, the pro forma rate applies only to your US wages. Any other US income (like dividends, etc) you report on your 1040NR would still be taxed at the non-resident rate for canada

WindsorON · Post by **WindsorON** » Mon Jan 26, 2009 1:35 pm

Thanks for the quich response, nelsona.

I picked standard deduction on "fake 1040" and itemized deduction on 1040NR. is this ok?

nelsona · Post by **nelsona** » Mon Jan 26, 2009 1:57 pm

No. You must itemize on the fake 1040. this is clear in the technical explanation.

Then, on your 1040NR, you itemize (you have no choice anyways), you are only filling it to make sure that your 1040NR is not less than what your 1040 yeilded (in which case you don't need the XXV(4). In some cases this may be less than 1040, especially where both are working in US.

WindsorON · Post by **WindsorON** » Mon Jan 26, 2009 2:02 pm

nelsona, in this post
http://forums.serbinski.com/viewtopic.php?t=1597

you mentioned that people should be able to claim child tax credit by the non-discrimination clause of the treaty. If I use the 'pro forma' way, can I calim the child tax credit in 1040NR? Since I cannot claim it in the Fake 1040 (it is in line 52 after the tax calculation)

nelsona · Post by **nelsona** » Mon Jan 26, 2009 2:12 pm

Take $2000 of the line 44 amount. I guess technically you should be using line 56, minus any foreign tax credit (foreign tax credits are specifically excluded from pro forma calc, but not foreign tax deduction).

You didn't present this as one of your options.

WindsorON · Post by **WindsorON** » Mon Jan 26, 2009 2:21 pm

so the rate will be: line 56/line 43, correct?

Back to itemized deduction, there is no form 1098 to report mortgage interest in Canada. Suppose I can get the amount from the bank in Canada and I just list that number in schedule A.

WindsorON · Post by **WindsorON** » Mon Jan 26, 2009 2:26 pm

Forget to mention, All our income is from US wage and bank interests from Canada. so no foreigh tax credit issue.

nelsona · Post by **nelsona** » Mon Jan 26, 2009 2:29 pm

Of course, just like any US citizens living in canada, you deduct the interst you've paid. Thts should be eassy to figure out.

And note that foreign income tax paid is a deduction. I hope you caught that in my last post. so any tax you paid 9was withheld) in canada in 2008, and any tax payment you sent in in 2008 (even for previous years) is deductible on your pro forma.

spocket · Post by **spocket** » Tue Jan 27, 2009 5:49 am

[quote="nelsona"]According to the technical explanation, it is method #2: line 43/line 44.

Note that your pro forma cannot use the standard deduction, you must itemize.
[/quote]

Oups.. The last 2 years, I used method 1 for the calculation of the "Effective Tax Rate" (such as displayed in Turbotax).

Also, I used the standard deduction.

Nelson: Where can I find this "technical description" you refer to that stipulates these 2 rules?

nelsona · Post by **nelsona** » Tue Jan 27, 2009 8:21 am

http://www.irs.gov/pub/irs-trty/canatech.pdf

"(determined without any of the benefits made available by paragraph 4, such as the standard deduction)"

But note what I said above. Your pro forma allows you to itemize, and this itemization INCLUDES DEDUCTING all the Cdn tax you paid during the tax year.

So, your pro forma, using the itemized deductions, would have led to an even LOWER US tax bill (not that that matters -- your goal is jus tto lower the US tax sufficiently to use it all up on your Cdn return).

spocket · Post by **spocket** » Tue Jan 27, 2009 8:31 am

Correct me if I am wrong, but the more I think about it, the more I believe that to correctly calculate the "effective Tax Rate" on the pro-forma 1040, it should be done as

Eff. Tax Rate = Total Tax (line 61) / Adjusted gross income (line 37)

Then, use this rate to change the value of Total Tax (line 57) on 1040NR invoquing article XXV(4). That's the way I have done it in the past few years.

Otherwise, full effects of deductions and AMT results from "1040 ProForma" are not taken fully into consideration to lower tax rate on 1040NR.

Thanks in advance for your always very informative feedback...

nelsona · Post by **nelsona** » Tue Jan 27, 2009 8:53 am

The technical explanation disagrees with you. They take into account deductions etc. AMT is a new animal, and was not addressed in that article. If you want to add AMT go ahaead.

The treaty article overrides AMT by the way. Any AMT calculated on the 1040NR is superceded by what you calculate on your pro forma.

The article is there to do one thing and one thing only: have a married Cdn resident pay US tax on his wages at the same rate that a married US citizen would. It is done with the knowledge that they will be reporting this income in canada, and thus do not need to reduce their tax very much.

The example in the tech directive are pretty clear: taxable and income and the tax and credits calculated therefrom. Only exception is FTC. Technically, unless the kids are US citizens, one should not get the child tax credit either on the pro forma, but that is up to you.

spocket · Post by **spocket** » Tue Jan 27, 2009 9:36 am

Thanks Nelson. it is more clear now. Actually, I was in the process of writing my last post at the same time you were posting the link to the technical information, so I did not have it at the time. Sorry about the confusion.

I see what you mean with the example they describe in the tech. info, where deductions are taken into consiredation.

I get it now: as long as I apply the eff. tax rate from 1040ProForma (following your original answer) to "total tax - line 57" of 1040NR, AMT will be superseded by the treaty.

Thanks again.

WindsorON · Post by **WindsorON** » Tue Jan 27, 2009 1:02 pm

Question about Form 8833. Thanks a lot.
which option should I check on form 8833?
1)The taxpayer is disclosing a treaty-based return position as required by section 6114
2) The taxpayer is a dual-resident taxpayer and is disclosing a treaty-based return position as required by Regulations section 301.7701(b)-7

also I am not sure what should be filled in item 2 and 4

2. List the Internal Revenue Code provision(s) overruled or
modified by the treaty-based return position

4.List the provision(s) of the limitation on benefits article (if any) in the treaty that the taxpayer relies on to prevent application
of that article