foreign currency handling of sale of main home

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Pamela
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Post by Pamela »

This seems a little complicated - maybe you need professional advice. Perhaps the host of this forum could help you out.
nelsona
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Post by nelsona »

I'd say unnecesarily complicated.

You bought a house at one US price and sold it at another. If you want to fold in the currency fluctuation, just do so as part of the cost basis and proceeds from the house transaction.

Besides, unless you had very little Cdn income before you returned to US, filing as a full-year resident is unlikelyto save you any US tax, and will do NOTHING to reduce your Cdn tax.

<i>nelsona non grata</i>
nelsona
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Post by nelsona »

I agree with your exchange rate strategy.

Be careful about the foreign tax credits, though. Use a tax program to calculate this, as you will likely find that you will not get much more than 1/2 of your Cdn taxes as a credit, once all the limits kick-in.

If I was going to file full-year in your situation, I would tend to want to use the FEIE exclusion (if I had been out of US a year or more -- you might not have) first, and only use FTC on Cdn income that didn't qualify.

By the way, filing 'dual-status' (ie. 1040NR and 1040 part-year) might also get you some deductions you're hoping to get with a full-year 1040.

<i>nelsona non grata</i>
nelsona
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Post by nelsona »

It is mathematically impossible for foreign tax credit to completely erase the US tax on the foreign income, as the US tax on your foreign income is at your marginal rate, but the foreign tax credit is at your effective rate.

I'm serious about using software to do this, you are NOT doing it correctly otherwise.

So if your marginal US rate is 25% and your effective (gross) rate is 17%, you will only get 17% tax credit, regardless of how much Cdn tax rate was. You will have a huge carryforward of cdn tax, which you may or may not be able to use. Multiply this by having to use various 1116s for each type of income and its a mess.

As to FEIE, Cdns do NOT have to have actually filed as US resident for entire time, since by treaty Cdns are automatically treated the same as US citizens if it is to their advantage (that is why Cdns can file full-year 1040 without having met SPT). This is by Article XXV. You thus can FEIE as a Cdn, even if you have never set foot in US previously.

Your comments about the advantages of joint full-year filing are correct. However I think you'll find that the FTC is not as favourable as you thought, and FEIE will be much better.

<i>nelsona non grata</i>
nelsona
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Post by nelsona »

The IRS, as opposed to CRA, likes one to use an exact exchange rate for each transaction. CRA allows one to use one rate per year if one wishes.

For the numbers you are talking about, your exercise hardly seems woth the effort, and there is little of 'cross-border' interst in it.

It is the FTC,FEIE, and filing status that will make a much bigger difference, and you should be focussing primarily on this.

Remember too, that, since you are not a US citizen, if you try to write off a big cap loss for a period of time when you were not resident of US (this has nothing to do with how you opt to file in US), IRS could, by treaty disallow such loss, just as you can exclude any capital gain from this period (again, regardless of how you file). By treaty, only the country of residence taxes capital gains or losses.

<i>nelsona non grata</i>
nelsona
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Post by nelsona »

By 'using software' I mean bona fide tax software, not a homemade spreadsheet.

Another point: Most of your itemized deductions will go against your Cdn income, further reducing the Cdn tax usable as a FTC.

There is also Foreign tax credit AMT, which prevents the tax on foreign income from being more than 90% written off. In other words, unless you can exempt income completely (by treaty or FEIE) one is bound to pay at a minimum 2.5% IRS tax (10% of say 25% marginal rate) on their foreign income. If you made $50K before leaving Canada, that is your $1000 in taxes.

Again, this will only be worked out accurately by tax software.

How much do you earn per hour? Your excessive calculations are probably not worth your time (atlthough I would share your fascination with them).

If this was your first go round doing US taxes, I would say go thru it. But you should know 1040's and 1116's by now, and realize that
you don't get much for your foreign tax dollar.

<b>Concrete example: My wife has $1000 of Cdn income to add to our 1040. We will owe $250 extra IRS tax. The tax software for 1116 yields an FTC of <i>$108.</i> I have reviewed the 1116 calcs and they are correct.</b>

I'm sure that filing full year gets you a bigger deduction, but at the cost of (a) a lousy FTC breakdown, and (b) already endless cap loss calculations, which may be denied in any event.


<i>nelsona non grata</i>
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