Part-year 1040 vs full-year 1040NR

[elgoog]

I am a Canadian citizen who moved to US in September 2021 with my spouse, who is also a Canadian citizen.

I am trying to decide how to file my returns for 2021. Which one of these options should we go for:

1. Full-year 1040NR, which means that I will have to pay Canadian tax on all my income
2. Dual-status return (Jan-Sep will be 1040NR and then Sep-Dec will be 1040) - I can make this choice under treaty rules as well as under the first-year choice

I know that filing a full-year 1040 is allowed as per treaty and is the best option for deductions but I and my spouse held TFSAs and other accounts in 2021 prior to moving to the US. As a result, the return will be quite complicated.

I am leaning towards option #2 since even without all deductions, I will be subjected to a lower tax rate in the US for 2021. I am just curious if we can file as MFJ for the dual-status return?

Thank you.

[elgoog]

Looks like I can do MFJ as per https://www.irs.gov/publications/p519#e ... 1000222177 but then it becomes complicated since you have to report full-year income, which would mean reporting TFSAs and so on.

[nelsona]

Filing 1040NR does NOT mean you have to report all your income in Canada for the year. You left in September, and this are considered non-resident for that portion of the year.

How you file in US does NOT impact your Cdn filings.

[nelsona]

If you file 1040NR, You would only need to continue reporting world income to canada if you maintained an empty house, or your family was still in Canada, since you would not qualify yet as a deemed non-resident, THEN it would make sense to file dual-status (using the first-year choice), c;iming the treaty.

But if you do not have those ties mentioned above, you are for those 4 month legally allowed to file a 1040NR reporting only US income, and a September departure return for Canada.

[nelsona]

And yes, you are, as a Cn, ALWAYS allowed to file a 1040.

[elgoog]

I forgot to mention that I was working for a US company the entire time and had US income tax withheld.

1. If I file a full-year 1040NR, on my Canadian return, I would be able to claim only the credit for the tax paid from Jan - Sep right?

2. If I file a dual-status return with 1040NR for Jan - Sep and 1040 for Sep - Dec, I would have to split the income tax paid between the 2 returns?

[nelsona]

1. Yes, because you will only be reporting the US income from that period to CRA. You will prorate the tax and fica (ie. 8/12ths)
Canada can deny the tax credit, since really you should have been paying Cdn tax first, not second, but they will probably let it slide. The rules have been loosened due to covid.

2. No, in this case the 1040NR serves a "statement". you will transcribe the income amounts from the 1040NR to the 1040 and determine the tax there.

You should simply file 1040NR or 1040 full year, choose which gives you the lowest US tax. Dual is rarely worth it, and given your questions, it is unlikely that you will get it correct.

[elgoog]

Yeah, I think I agree with the last point. Filing dual seems a bit complicated for my case and splitting income and taxes between the 2 will get complicated.

I am leaning towards full-year 1040NR since doing a full year 1040 will incur additional filings as I had a TFSA right before I moved to the US.

Just for my information, can you clarify what you mean by

2. No, in this case the 1040NR serves a "statement". you will transcribe the income amounts from the 1040NR to the 1040 and determine the tax there.

[nelsona]

when doing dual status, the 1040NR merely serves to determine the INCOME from the non-resident portion of the year (ie. the US-sourced income). Then those income numbers are transferred to the appropriate lines of your dual-status return, the 1040 along with ALL world income from the second part of the year. It is on the 1040 that any allowable deductions, credits etc are taken, as well as the determination of your final tax for the tax year.

[elgoog]

I see. Now that you explained it, I see it here: https://www.irs.gov/individuals/interna ... tus-aliens (Resident Alien at End of Year)

I was mistaken that one again starts from 0 for the resident part of the year but that doesn't seem to be the case since the 1040-NR U.S. source income is just added to the worldwide income.

Now I can see why there is no benefit in filing a dual-status return in my case, especially since I can't claim standard deductions or file as MFJ. So, in the end, a dual-status return or 1040-NR would end up in the same amount of tax. The dual-status return just complicates matters and offers no additional benefit.

Thanks for the explanation, Nelsona.

[elgoog]

One more question: Can I use the full 401K deduction for my Canadian return or does it have to be distributed across the year?

I contributed to my 401K at the start of the year while I was in Canada.

Thank you.

[nelsona]

Only the portion that qualifies for inclusion on the form you are using.

From what weve discussed NONE of your 401(k) contributions are eligible. You are not qualified for RC267, unless you were previously a US resident employee for that employer. You are not eligible for RC268 since the wages you are reporting were earned in canada, and contributions can only be counted if you were working in US (commuting).

[nelsona]

... and once you moved, you are no longer reporting the wages earned after that date, and are not commuting, so you cannot claim 401(k) contributions for that time either.

[elgoog]

Nelsona, you mentioned earlier that how I do my US filings does NOT impact my Canadian filings.

Question on this: what happens to any interest earned from my US bank accounts after September? I will report it on my 1040-NR since I was a Canadian non-resident from September - December. I assume they do not need to be reported on my Canadian returns. How do I report these and at what rate will those be taxed?

[elgoog]

I suppose I cannot claim the treaty benefits since I was NOT a resident of Canada after September and will have to report them on my 1040-NR.

What happens to any interest that I earned on my Canadian bank accounts from Sept - December? Would they also need to be reported on my US tax return then?