Hi,
Early 2014 I left Canada and now I am a US resident, I am trying to optimize my tax returns for both Canada and US but it seems there is a number of hypothesis and each has a different outcome (I am using TaxAct for US filing and Ufile for CRA filing):
-My understanding is that I have two options for US filing: MFJ & MFS
Unfortunately I have substantial income for my one-month residency in Canada in 2014 (RSUs and bonuses) which makes MFJ not to be advantageous compared to that of MFS. I have seen in this board that MFJ has always been mentioned as the recommended option. Could it be that I am doing something wrong? I have used form 2555 and 1116 in TaxAct and it seems I won't be able to exempt much from my Canadian income and the FTC that I get from 1116 is not offsetting taxes I have paid in Canada so I need to pay the difference to IRS
-Before living Canada I had outstanding balance on my HBP, which I am including in my income for 2014 for Canadian filing per CRA instruction. Should I include this as worldwide income for IRS filing in addition to my wages in Canada? If the answer is no how could I treat this in 1116 (i.e., how should I calculate the taxes I have paid to Canada on my wages only excluding HBP repayment as income)
-I still have substantial RRSP room that I can use to lower my taxes for CRA filing. Should I maximize my RRSP contribution for the departure year given that I will get about 40% back from CRA and QC combined? I believe I still have 3 weeks to make this happens. More importantly, how this RRSP contribution will impact my reportable income to US? Could this effectively increase the taxes that I owe to IRS given that RRSP contribution is not deductible from worldwide income from US perspective.
I really appreciate any feedback on these matters, given my special situation I have not found any answer to these questions browsing the internet for last two weeks.
Repaying HBP as non-resident and US tax return
Moderator: Mark T Serbinski CA CPA
I would think, if you were in US for 11 months, that MFJ (FULL YEAR) would be better than MFS (11 months - itemizing only, no standard deduction) -- if you can use 2555 most certainly it will be.
While indeed there may be some extra tax if you use 1116 (2555 only applies to earned income), this would also imply that you are making good income in US, and therefore your MFS taxrate will be pretty high, and I'm assuming you don't have a lot of deductions.
Your HBP is not considered income for US tax purposes regardless of how you file.
The principal for 1116 is that you include the foreign tax that was paid or accrued with respect to the foreign income you include. So in this case, you prorate whatever Cdn tax you paid over the income you include on 1116. Since you are not including wages, and not including HBP, the 1116 income you are using will be small (as will the Cdn tax).
Rarely does one get full credit for the foreign tax, and even less likely does on cover the US tax that was dded due to the foreign income. That is how 1116 is designed.
But I think your issues are how you are doing MFS (and don't forget your spouse's income would be MFS too), and you're not being allowed to use standard deduction. Also keep in mind that if you recieved this Cdn income after you moved to US, you have to report it on youyr dual-status MFS anyways.
As to making a final RRSP contrib: sure, as long as it is all in the 40% tax bracket AND if your RRSP allows you. You would of course have told your RRSP that you live in US and have recieved approval from them to keep your account, but they sometimes will not accept new monies in that account. This will only reduce your Cdn tax and may bump up your US tax a little bit.
Of course, if you have doen both ways correctly (you include all the required income and do not use standard dedution on MFS), and it comes up best for both of you to use MFS, feel free.
While indeed there may be some extra tax if you use 1116 (2555 only applies to earned income), this would also imply that you are making good income in US, and therefore your MFS taxrate will be pretty high, and I'm assuming you don't have a lot of deductions.
Your HBP is not considered income for US tax purposes regardless of how you file.
The principal for 1116 is that you include the foreign tax that was paid or accrued with respect to the foreign income you include. So in this case, you prorate whatever Cdn tax you paid over the income you include on 1116. Since you are not including wages, and not including HBP, the 1116 income you are using will be small (as will the Cdn tax).
Rarely does one get full credit for the foreign tax, and even less likely does on cover the US tax that was dded due to the foreign income. That is how 1116 is designed.
But I think your issues are how you are doing MFS (and don't forget your spouse's income would be MFS too), and you're not being allowed to use standard deduction. Also keep in mind that if you recieved this Cdn income after you moved to US, you have to report it on youyr dual-status MFS anyways.
As to making a final RRSP contrib: sure, as long as it is all in the 40% tax bracket AND if your RRSP allows you. You would of course have told your RRSP that you live in US and have recieved approval from them to keep your account, but they sometimes will not accept new monies in that account. This will only reduce your Cdn tax and may bump up your US tax a little bit.
Of course, if you have doen both ways correctly (you include all the required income and do not use standard dedution on MFS), and it comes up best for both of you to use MFS, feel free.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
Thank you so much for the comprehensive response. Now I need one clarification wrt 1116 based on your reply:
Let's say I have 48k of Cdn income for one month in Canada which all can be categorized as WAGES. Is it correct to use 2555 to get FEIE of about 48k/12=4k and then use form 1116 to claim FTC for the remaining 44k under the general category income (wages)?
If so should I also use the itemized deduction that I have already used in Schedule A for 1040 in form 1116? I should note that I have itemized deductions (Moving expenses, Mortgage interest, Property Taxes, state taxes) which far exceed standard deduction and all are paid while I was a US resident (so none of these itemized expenses are related to my foreign income or my residency in Canada).
I would like to make sure TaxAct has done this calculation correctly by doing it manually.
Let's say I have 48k of Cdn income for one month in Canada which all can be categorized as WAGES. Is it correct to use 2555 to get FEIE of about 48k/12=4k and then use form 1116 to claim FTC for the remaining 44k under the general category income (wages)?
If so should I also use the itemized deduction that I have already used in Schedule A for 1040 in form 1116? I should note that I have itemized deductions (Moving expenses, Mortgage interest, Property Taxes, state taxes) which far exceed standard deduction and all are paid while I was a US resident (so none of these itemized expenses are related to my foreign income or my residency in Canada).
I would like to make sure TaxAct has done this calculation correctly by doing it manually.
Your exclusion calculation for 2555 is incorrect. The limit you can exclude is 1/12th of the ANNUAL limit, not 1/12 of what you earned. The limit for 2014 was $99,200, so you can exclude 1/12 of that which is ~$8000. Use actual days (divided by 365) rather that whole months to come up with your percentage.
The rest of your income (other than HBP) is eligible for 1116. Some will be passive and some will be general limit. the Cdn tax available for use will be all except the tax related to HBP and the tax related to the 2555 income (prorated of course). don't forget EI and CPP contributions.
You can use itemized deductions on schedule A. Moving expenses are not a deduction, they are an adjustment to gross income.
Since none of your deductions is related to the Cdn income you earn, simply let software determine the rest of form 1116, you simply input the foreign income (in each category) and the foreign tax. The software will do the rest. I wouldn't worry about doing it manually.
Did your spouse earn a high income? If not, then there simply is no way that MFJ will work out worse than MFS.
The rest of your income (other than HBP) is eligible for 1116. Some will be passive and some will be general limit. the Cdn tax available for use will be all except the tax related to HBP and the tax related to the 2555 income (prorated of course). don't forget EI and CPP contributions.
You can use itemized deductions on schedule A. Moving expenses are not a deduction, they are an adjustment to gross income.
Since none of your deductions is related to the Cdn income you earn, simply let software determine the rest of form 1116, you simply input the foreign income (in each category) and the foreign tax. The software will do the rest. I wouldn't worry about doing it manually.
Did your spouse earn a high income? If not, then there simply is no way that MFJ will work out worse than MFS.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best