irs underpayment penalty in the year of moving to Canada from the US

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pokka
Posts: 29
Joined: Sat Feb 27, 2021 10:16 pm

irs underpayment penalty in the year of moving to Canada from the US

Post by pokka »

Hi all,

I moved to Canada from the US in the middle of 2021. From my preliminary calculations, it seems like I will owe an underpayment penalty to the IRS (and will get a massive refund from the CRA). Is this typical?

I seem to be in a much lower tax bracket in Canada for this year because of only the part-year income, and so my effective Canadian tax rate is lower than it will be in future years.

On the other hand, because of the above I get a much smaller FTC on my US taxes this year than I was counting on, and so I seem to have to pay quite a lot to IRS (and I even have to pay a penalty).

This seems like it should happen to everyone .. does anyone have any experience with this?
Do you think I could request the IRS to waive the penalty?

Thanks!
nelsona
Posts: 18314
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Re: irs underpayment penalty in the year of moving to Canada from the US

Post by nelsona »

When di you move to canada, and are you a US citizen?

perhaps you should consider using FEIE (form 2555) instead of FTC.

It is rare that a US taxpayer living in Canada pays tax to IRS, but it can and does happen in a move year, particularly if the move was in May-July.

That is why I'm suggesting you exclude your Cdn wages entirely by FEIE. You are allowed to do this once you have been out of US for a year, and prorate the exclusion for the number of days you were in Canada for the year. You would have to continue using FEIE year after year once you do use it, so think about it.

At least try both ways (with software of course) and see.

But, generally, if you underpay the IRS, you will have a penalty. Unlike Canada which allows one and sometimes two years of underpayment, before they put you on installments.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
pokka
Posts: 29
Joined: Sat Feb 27, 2021 10:16 pm

Re: irs underpayment penalty in the year of moving to Canada from the US

Post by pokka »

Yes, you are right, my move was in July.

I understand your idea about FEIE, I will try it out and see, thanks so much!

I heard that FEIE is better for countries with low tax rates ... and this is consistent with your suggestion for me since half-year-income in Canada is indeed a low tax rate situation.

Many thanks nelsona!
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