Claiming standard deduction on 1040NR?

craudiu · Post by **craudiu** » Wed Mar 23, 2011 2:18 pm

I couldn't find the answer to a rather simple question...
As a married resident of Canada, can I claim the standard deduction by treaty?

nelsona · Post by **nelsona** » Wed Mar 23, 2011 2:44 pm

1040NR doesn't have standard deduction. You would need to file 1040.

nelsona · Post by **nelsona** » Wed Mar 23, 2011 2:45 pm

You would need to file an Article XXV(2) 1040NR, prepared by using pro forma 1040 first. I've explained this in detail elsewhere.

craudiu · Post by **craudiu** » Wed Mar 23, 2011 3:25 pm

Thanks again, nelsona... this forum won't be the same without you, if you decide to stop participation.
I couldn't find your detailed explanation. Will look a little bit further, though since I am not a Canadian CITIZEN, only resident, maybe article XXV(2) doesn't even apply to my case :(

nelsona · Post by **nelsona** » Wed Mar 23, 2011 4:45 pm

the clause ia XXV(3), and applies to Cdn residents regardless of citizenship.

craudiu · Post by **craudiu** » Wed Mar 23, 2011 4:58 pm

Oh yeah, that one I had already learned about.
So there is no way to get the standard deduction...
Thanks!

nelsona · Post by **nelsona** » Wed Mar 23, 2011 5:13 pm

Yes, there is, by filing as I said.

In any event, reducing US tax only helps if your Cdn tax will be lower, otherwise Canada will simply eat up more.

But seriously, XXV(3) was made for peaople exactly like you. Itr is prooably worth doing.

craudiu · Post by **craudiu** » Wed Mar 23, 2011 11:05 pm

But filing a 1040NR with a pro forma 1040 for MFJ rates won't give me the standard deduction, I will have to itemize, right?
It is definitely worth and I will do it, but even then, there is still room to lower my US tax in about $1600 until it is the same as Cdn tax... that is why I am trying to find other deductions.

nelsona · Post by **nelsona** » Thu Mar 24, 2011 5:56 am

On the the pro forma 1040 you use ALL the deductions and credits that anyone else is entitled to, and figure your tax RATE from this, and then use that rate on your 1040NR. So you in effect get the MFJ standard deduction.

nelsona · Post by **nelsona** » Thu Mar 24, 2011 5:57 am

And don't forget that you get other things like mortgage interest, real estate tax, etc. So you may even have itemized deductions that exceed standard.

craudiu · Post by **craudiu** » Wed Mar 14, 2012 3:19 pm

I didn't think I could use the standard deduction on the pro-forma 1040 because I read this document: http://www.irs.gov/pub/irs-trty/canatech.pdf

On page 48, it says: "The formula limits the United States tax with respect to wage income to that portion of the total U.S. tax that would be payable for the taxable year if both the individual and his spouse were United States citizens as the individual's taxable income [b](determined without any of the benefits made available by paragraph 4, such as the standard deduction)[/b] bears to the total taxable income of the individual and his spouse."

nelsona · Post by **nelsona** » Wed Mar 14, 2012 4:11 pm

What this paragraph is saying is the income will be determind by 1040NR, which does not permit standard deduction.

If you read on, the same paragraph states that "In determining total taxable income of the individual and his spouse, the benefits made available by paragraph 4 are taken into account, but a deficit of the spouse is not."

So what they are saying, which exactly what is done in practice, is that you determine the pro forma exactly has anyone else would, using all available credits, deducutions, etc to determine the tax rate that will apply to the US wages reported on his 1040NR. But you cannot use the stadard deduction on 1040NR to reduce the income that you will make the final calculation from.

craudiu · Post by **craudiu** » Wed Mar 14, 2012 4:54 pm

I get it now. the IRS used a very convoluted way to explain it.
Too bad that, because it will also alter the 1040NR/1040 income ratio, the impact on the tax payable is drastically reduced... for every $1,000 saved on the pro forma 1040, you'll get about $100 on the 1040nr.

Thanks, nelsona!

nelsona · Post by **nelsona** » Wed Mar 14, 2012 6:24 pm

I don't think it works that way. this implies that only 1/10th of your family world income is reported on 1040NR.

Is that the case?

craudiu · Post by **craudiu** » Thu Mar 15, 2012 2:48 pm

[quote="nelsona"]I don't think it works that way. this implies that only 1/10th of your family world income is reported on 1040NR.

Is that the case?[/quote]

No! Actually, all of my income comes from my job in the US and my wife has no income, so 100% of it goes on form 1040nr. You lose a lot comparing to the 1040 because it alters the ratio between your taxable income on 1040NR versus 1040.
I'll illustrate with an example.
Let's suppose a family of 4 (2 kids) and one income of 60,000.

Form 1040NR:
Income: 60,000
Itemized deductions: 3,000
Exemptions: 14,600
Taxable income: 42,400

Situation 1: Itemized Pro forma Form 1040 will be the exact same as 1040NR (taxable income is 42,400, assuming, of course, that you don't have additional deductions to itemize) but we'll be able to use the MFJ table and the tax will be 5,514.

Situation 2: Pro forma Form 1040 with the standard deduction of 11,600 brings the taxable income down to 33,800 and the tax will be 4,224 (almost 1,300 less).

Now applying the formula: Form 1040NR Taxable income/Form 1040 Taxable Income X 1040 Tentative Tax = Tax

Situation 1: 42,400/42,400 * 5,514 = 5,514
Situation 2: 42,400/33,800 * 4,224 = 5,299. That's only $215 less.

So it was not exactly 10% for this example, but you get the idea. The actual savings will be different according to the marginal tax rate.