FEIC vs FTC & capital gains from currency conversion

[fadius]

US/Can dual citizen living in Canada.

In the past, only had US rental income + Canadian Full-time employment income and have always used the FEIE method in US tax return.

For 2024, in addition to incomes above, have US dividend income ("ordinary" per 1099), Canadian Capital gains and interest (from matured GIC).

If continuing to use the FEIE method, a portion of the taxes paid in the US would the result of the additional Canadian CG and interest income. My understanding is that we wouldn't be able to claim foreign tax credit for that on the Canadian side. Does this mean that it would be better to switch to the FTC method instead ?

On the Canadian side, all of the capital gains come from USD/CAD currency conversion (deemed disposition from purchasing US stocks with USD funds that were held for a couple of years). Is this treated similarly on the US side? should be reported as foreign capital gains?

Thank you.

[nelsona]

Since FEIE doesn't apply to interest, dividends and cap gains, you can still use FEIE for your wages, and passive 1116 for your interest, and cap gains, which are considered CDn-sourced. Your US dividends are only to be taxed at 15%, which I suspect you are being taxed less than that in US.

[fadius]

hmm I had read that you could either use FEIC or FTC but not both... sounds like that only applies the 'General Income' category.

Alright that's very helpful. Thank you. I'll give it a shot on taxact and see how far I can take it !

[nelsona]

No, it only applies to earned income, in your case wages. FTC applies to all other incomes. In fact, if your wages exceed the annual FEIE limit, you get to use FTC on the excess. So it is never simply one or the other.

Now, it might be, that to reduce your US tax to only the 15% or less on US dividends (which should be your goal), you may need to switch your wages to FTC, but that would require permission from IRS.

I rarely suggest one use FEIE when living in Canada, since the Cdn tax will always outweigh the US, so FTC will work fine. FEIE is most useful when one lives in a tax-free or low-taxed country.

[fadius]

Thank you, learning a lot today!

re: " you may need to switch your wages to FTC, but that would require permission from IRS"

I did some searching to get more info but I can only find references to requiring permission from IRS when switching from FTC back to FEIE within 5 years of revoking FEIE election. As far as I can tell, I'm able to switch from FEIE to FTC any time (explicitly revoking FTC isn't even required). Is that incorrect?

[nelsona]

You are correct. It is switching back that needs permission.