Deducting Canadian Departure Taxes in US

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canadiandeserter
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Joined: Sun Mar 01, 2015 10:52 pm

Deducting Canadian Departure Taxes in US

Post by canadiandeserter »

Supposed one emigrated from Canada to the US in a prior year and deferred payment of the departure taxes. The US does not tax the deemed acquisition (assuming no treaty election) so a foreign tax credit would not be useful.

How about a foreign tax deduction? If the taxpayer uses the cash method of accounting, could he/she claim the departure taxes paid while US resident as an itemized deduction on schedule A?

Unlike IRC § 901/904, § 164 does not explicitly limit the deduction available, so can an itemized deduction be claimed even though the US does not tax the corresponding transaction?
nelsona
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Re: Deducting Canadian Departure Taxes in US

Post by nelsona »

Correct. Regardless of the method of accounting taxes actually paid in a tax year can be used as a deduction, so long as it is not against income that was excluded using FEIE.
It's the same principle if one pays taxes owing for 2020 in 2021. It can only be deducted in 2021. It can be used as a credit in either year depending if one choses accrual or paid for a particular year on form 1116.
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canadiandeserter
Posts: 58
Joined: Sun Mar 01, 2015 10:52 pm

Re: Deducting Canadian Departure Taxes in US

Post by canadiandeserter »

Thanks nelsona! So any foreign income taxes paid (except when excluded by FEIE), whether or not that income is taxable by the US, can be used as an itemized deduction?

Seems like this is a good way to get a "discount" when prepaying Canadian deferred departure taxes, or any other deferred tax, until AMT kicks in.

Would the CRA tax payment receipt and the Canadian income tax return with Form T1243 and Schedule 3 from the departure year be sufficient for the IRS, if requested?
nelsona
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Re: Deducting Canadian Departure Taxes in US

Post by nelsona »

Sure.

Not sure what you mean by prepaying deferred tax. Isn't that simply paying the tax?
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
canadiandeserter
Posts: 58
Joined: Sun Mar 01, 2015 10:52 pm

Re: Deducting Canadian Departure Taxes in US

Post by canadiandeserter »

Sorry for being unclear. You are right.

What I wanted to emphasize was paying the taxes before they are due, since deferred departure taxes are due when the property is disposed, perhaps at a time no longer subject to US taxation.
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