Form 8891 questions here please!!!!

nelsona · Post by **nelsona** » Mon Jun 06, 2005 2:15 pm

<blockquote id="quote">quote:<hr height="1" noshade id="quote">Do I have to report the whole amount of company pension plan money as income on line 16b? <hr height="1" noshade id="quote"></blockquote id="quote">
No. only the growth since it was deposited in your RRSP.

<blockquote id="quote">quote:<hr height="1" noshade id="quote">There is no way to establish cost basis for that since I don't know the amount of company pension plan at my entry<hr height="1" noshade id="quote"></blockquote id="quote">

Of course there is.

The cost basis for that money is the amount that was deposited into your account by your firm (again, in US dollars on the day it was deposited).

nelsona non grata... and non pro

geekinfinity · Post by **geekinfinity** » Mon Jun 06, 2005 4:24 pm

nelsona: Thanks for the comment.

I wonder if you can answer another one. I talked to a tax attornary about this and surprisingly he told me just wait until the 2005 tax return and file the form for 2005 alone. He said that I can only amend for three years (I need to go back to 1998) and it is not worth opening a can of worm.

Igf only I can make it goes away by paying penalty. The interests that I have earned over these years is about 4,000. How do you think is the best action?

1) My original proposal, back amend to 1998.
2) Amend for 2004 alone and check no on 6a on Form 8891 and wait for them to ask for info and pay the penalty.
3) Don't amend and wait till 2005 to check no on 6a on Form 8891 and hope for the best.

My primary objective is to bring myself up to code as painlessly as possible and if I have to pay them, then I will pay them. I just don't want to be sued.

Thanks.

steph · Post by **steph** » Mon Jun 06, 2005 4:47 pm

If You want to talk to Mr. Serbinski, He is in Toronto not too far from Detroit 4 hours drive. May be able to save thousands of dollars on panelty that you want to pay

nelsona · Post by **nelsona** » Mon Jun 06, 2005 5:00 pm

Geek

The problem is not only the penalty for not rpeorting (or deferring) income.

The problem is that, since 2002, one must report even the existence of RRSPs either on a 3520 form or on an RP 02-23 statement (or, now, form 8891).

The penalties associated with not REPORTING the trust (RRSP) are much more severe than not reporting the supposed income.

nelsona non grata... and non pro

geekinfinity · Post by **geekinfinity** » Mon Jun 06, 2005 5:29 pm

nelsona: Thanks. I guess the tax lawyer that I talked to may not be familar with this situation.

Since he said I can only amend past 3 years of return, do you think it is a better idea if I back amend from 2001 instead of 1998.

Thanks again for your help.

nelsona · Post by **nelsona** » Mon Jun 06, 2005 5:38 pm

You can ammend as far back as you wish. If IRS finds errors in the past 3 years, they certainly could go back farther.

There is no harm in correcting this oversight before they find it.

nelsona non grata... and non pro

geekinfinity · Post by **geekinfinity** » Mon Jun 06, 2005 7:28 pm

nelsona: Thanks again. I only wish I came across your website on rrsp six years ago.

I have learned a lot from you but I think I need some more handholding as I don't want to mess up. I probably should not "abuse" you too much, so I think I should probably give Mr. Serbinski a call as suggested by steph.

Before your advice, I wouldn't know what to ask.

If I may trouble you one more time, any suggestions on what info that I need to have and prepare before I call Mr. Serbinski.

Thanks again for your advice and I apprepriate you donating your time to help us.

nelsona · Post by **nelsona** » Mon Jun 06, 2005 10:12 pm

You need your yearly RRSP statements... and money[:D]

nelsona non grata... and non pro

geekinfinity · Post by **geekinfinity** » Tue Jun 07, 2005 9:36 am

nelsona: Thank you.

steph · Post by **steph** » Tue Jun 07, 2005 12:22 pm

I read in another thread that I can claim the taxes paid to Canada as itemized deduction for RRSP collapse. This sounds very strange in my situation.
I reported on 16a $13250 and 16b $250 (gain after us residency), and paid taxes to Canada $3312 (25%), then Can I really claim the whole $3312 as deduction or
I have to pro-rate it to the amount of income I declared on line 16b ($250).
If I pro-rate it, does this looks right: (250/13250) * 3312 = $62.50

But It does not look like a better option than taking foreign tax credit, which will give credit for taxes paid. At least in the case of foreign tax credit you can carry forward unused right?

I spoke to a CPA He told me that I can't take a deduction for foreign taxes paid against an income that I have not declared on 16b (That is $13250-250 = $13000) I did not declare $13000 as Income to US. But paid Canadian taxes on it. He said, it would not be allowed by IRS since that is the foreign taxes paid on excludable income.

See this scenario:

How is it when a US person work in Canada has income of let’s say $100,000 and exclude the income $80,000 (income exclusion limit) and claim the income of $20,000 in the US 1040; then Can that person claim Canadian taxes paid for the excluded income from US ($80,000) as itemized deduction on schedule A?

I would like to see any document actually allows such thing. If you know any on the web please let me know?

Is there anyone has taken on schedule A; a deduction for foreign taxes paid on RRSP income that was excluded in 1040 and IRS is OK with it???

Sorry, I know this is long-winded, but I was trying to be as detailed as possible [:p]

nelsona · Post by **nelsona** » Tue Jun 07, 2005 12:56 pm

<blockquote id="quote">quote:<hr height="1" noshade id="quote">I spoke to a CPA He told me that I can't take a deduction for foreign taxes paid against an income that I have not declared on 16b .... He said, it would not be allowed by IRS since that is the foreign taxes paid on excludable income<hr height="1" noshade id="quote"></blockquote id="quote">

This is a popular misconception.

In fact, there is no need for any connection between the foreign INCOME tax and the US tax, as clearly stated in the the criteria for an eligible foreign tax.(from Pub 514)

1. The tax must be imposed on you.

2. You must have paid or accrued the tax.

3. The tax must be the legal and actual foreign tax liability.

4. The tax must be an income tax (or a tax in lieu of an income tax).

Your RRSP tax meets all these requirements.

Now, your CPA, might be confused since, in practice, if one elects to use the taxes as a credit (FTC), the math in Form 1116 will result in a miniscule tax credit.

But, no such limit exists on the deduction (FTD).

By the way, the non-taxable income on line 16 is not 'excluded' income in the eyes of the IRS. Excluded income, is income that has been excluded by using (guess what) an exclusion, like the Foreign earned income exclusion. The foreign tax on such excluded income, is not eligible for FTC or FTD

nelsona non grata... and non pro

steph · Post by **steph** » Tue Jun 07, 2005 2:37 pm

Hi! Nelsona,

I don’t have a CPA but I spoke to a cross-border accountant in the south over the phone to find out his position on this.

I read the publication you have mentioned in the previous post:

Page 3 of Publication 514 says: You cannot take a credit or a deduction for foreign taxes paid on income you exclude under the foreign earned in-come exclusion

Page 3 second column also says: The foreign tax credit can only reduce U.S. taxes on foreign source income; it cannot reduce U.S. taxes on U.S. source income.

Again on page 7 first column it says
Foreign Taxes for Which You Cannot Take a Credit
This part discusses the foreign taxes for which you cannot take a credit. These are:
• Taxes on excluded income

Taxes on Excluded Income
You may not take a credit for foreign taxes paid or accrued on income excluded from U.S. gross income.

It seems to me that if I take a deduction it will reduce taxes on my US source income by $3312-$250 = $3062 (please see how I got the numbers in the previous post). $250 is the income I have claimed on line16b 1040. That is great if I can do that legally and flying below IRS radar.

What you said might be a technical loophole in IRS documentation. But if you read the above statements, IRS can come back and audit you based on that saying you can’t take a deduction in such that to decrease the taxes on US source income.

Even though RRSP meets all the 4 requirements you mentioned, it does reduce the taxes on US source income and therefore it could be opened to interpretation and dangerous to take the deduction.

As stated above, If you can’t take a credit of taxes on excluded income then how can you take deduction of taxes paid on excluded income?

Again sorry for long-winded post.

nelsona · Post by **nelsona** » Tue Jun 07, 2005 2:56 pm

<blockquote id="quote">quote:<hr height="1" noshade id="quote">Page 3 of Publication 514 says: You cannot take a credit or a deduction for foreign taxes paid on income you exclude under the foreign earned in-come exclusion<hr height="1" noshade id="quote"></blockquote id="quote">

Exactly: I had already explained this in my previous post.

<blockquote id="quote">quote:<hr height="1" noshade id="quote">Page 3 second column also says: The foreign tax credit can only reduce U.S. taxes on foreign source income; it cannot reduce U.S. taxes on U.S. source income.<hr height="1" noshade id="quote"></blockquote id="quote">

Yup. That is the credit. That is how form 1116 is constructed. Not the same for the deduction.

<blockquote id="quote">quote:<hr height="1" noshade id="quote">Again on page 7 first column it says
Foreign Taxes for Which You Cannot Take a Credit
This part discusses the foreign taxes for which you cannot take a credit. These are:
• Taxes on excluded income

Taxes on Excluded Income
You may not take a credit for foreign taxes paid or accrued on income excluded from U.S. gross income.<hr height="1" noshade id="quote"></blockquote id="quote">

The non-taxable income is NOT excluded income .. and if you want to get picky (I do), line 16a is gross income (that is its very definition!), so all of your RRSP withdrawal was included in gross income, just not NET income.

Many on this and the grasmick board have used this technique without question, some having even checked with IRS (for what that is worth). I have heard no reports of anyone getting auditted for this.

Its completely up to you of course.[:D]

nelsona non grata... and non pro

steph · Post by **steph** » Tue Jun 07, 2005 3:14 pm

Thanks Nelsona for quick reply. [:)]

It is an interesting logic that:
the non-taxable income on line 16 is not 'excluded' income in the eyes of the IRS.

I know that pub 514 is not strictly for foreign tax deduction.

This is very interesting. it reduces my US source tax liability and gives me a refund from US taxes. I can send you a christmas gift.[:D]
[8D]

nelsona · Post by **nelsona** » Tue Jun 07, 2005 4:28 pm

This concept is hard for Cdns to get their head around because (a) CRA doesn't give foreign tax deductions, just credits, and (b) we don't typically reduce income tax by deducting other jurisdictional taxes.

For example, the IRS grants a deduction for state income tax paid, and many states grant a deduction for federal income tax paid. It doesn't really matter how the state comes up with its tax (heck , you can even claim sales tax) but IRS accepts it as a tax deduction.

Could you imagine CRA giving a tax deduction for Qc taxes paid, and vice versa?

nelsona non grata... and non pro