Moved to Canada

[mmaganti]

I moved to Canada in June. My first paycheck from the Canadian employer started on July 1st, so I have 20 days of income from the US that I'll pay taxes for in Canada (as a newcomer). Now, my question is whether I can exclude this 20-day income from my 1040 using 2555 (this gives me a better refund than the 1116)?

Thanks!

[nelsona]

You have it mixed up. Only FOREIGN wages can be excluded using 2555, and only FOREIGN income can be used to get the credit on your 1116.

So, on your Cdn return, you can get credit for the US tax you pay on that slice of US wages you report on your T1.

What you exclude on your US return is ALL the Cdn wages only. The US wages are US-sourced so aren't eligible for any relief on the US return.

[mmaganti]

Thanks, that's what I thought.

The lady I spoke to at CRA confused me, because I called to find out if my US income for the period would be exempt in Canada under the tax treaty. She told me to read Article 10 and I've no clue what she's talking about.

I'm assuming I can use T2209 and get foreign tax credit.

[nelsona]

To give you an idea of t=what your tax returns should look like:

T1 - will have an arrival date in June, with personal credits prorated based on that.
You will report all your Cdn wages, plus the US wages you recieved after your arrival date. You will also report ALL other income you receieved after your move (interest etc). Remember that any investments you had take on a new cost basis the day you moved (deemed acquisition).
You will figure your foreign tax credit after completing the US return.

1040. You will report ALL income from averywhere on your 1040, and assuming you are US citizen, will continue to do so forever.
For 2008, you will either use 2555 to exclude your Cdn wages, or you will use 1116 for these wages and all other Cdn income you report (wages are general income, interst etc is passive income -- 2 1116's). You can use the tax as calculated on your Cdn return before you take the foreign tax into account. Your US return is finished.

Now return to your Cdn return. Say you reported $1000 of US wages on it. The US tax you paid on it is determined by your 1040: you take your total income (AGI) and your total US tax and come up with an effective tax rate. Multiply this by $1000 and this is your US incoem tax related to the $1000 you reported in canada. Same process for your state tax. Any fica you paid on those last paychecks is also eligible. Use this figure (US tax, state tax and fica) on your foreign tax credit lines in canada.

[mmaganti]

Thank you very much! This helps.

[mmaganti]

Sorry to bring this back up again. On the 1040, line 44 gives me the tax on my AGI. Is this the amount I will use to calculate my effective rate in the US, or will I use line 56, which is after the child credits are deducted?

Thanks!

[nelsona]

Since you get the child tax credit on either reeturn, I would simpl do the rate calculation at the AGI vs tax point, and then take the child tax credit afterwards on 1040NR. Either way is fine, but the way above gives you slightly better result.

[mmaganti]

Thanks! Now, does the 1040 that I send to CRA have to be exactly the same one I send to the IRS? Could I just leave the child credit off on the copy that I send to CRA? I can only file the US tax return in June to meet the Physical Presence test.

[nelsona]

What are we talking about here? When you talked about effective arte I thought you meant your were doing the xxv 1040NR, sorry for the misunderstanding.

For the foreign tax credit on your Cdn return, you will report actual TAX divided by your toatl income, to get the rate. So, it has to take into account any credit you get as well.

What you send to Canada is a copy of what you WILL ultimately send to IRS, even if you have to wait to send it to IRS, you can still send the final IRS return.

[nelsona]

A simpler way to know exactly what your fed tax was, rather tan look for it on a specific line, is what was withheld during the year MINUS your refund (or PLUS your final payment). Same for state.