RRSP Withdrawal and Foreign Tax Deduction

andydc · Post by **andydc** » Sat Apr 04, 2009 9:07 pm

I am a Candian Citizen with U.S. GC. I took out part of my losing RRSP portofolio in 2008, TDW withheld 25% of that - 5k. I used the money to pay the Canadian tax in 2008 due to reassessment of past years. After reading here the posts on RRSP and FTC, here is what I think the better way to file my U.S. return to recoup some of the tax paid on canaidan side, please correct me if I am wrong:
1) I will file 8891 for the distribution with 16a for total withdrawn amount and 16b is 0 for there was no growth on the account.
2) I won't be able to claim any FTC on 1116 for the foreign income is 0;
3) I can claim both the 25% withholding and the tax for reassessment as Foreign Tax Deduction on 1040 schedule A.

nelsona · Post by **nelsona** » Sat Apr 04, 2009 9:47 pm

Indeed any tax you paid to CRA in 2008 which is not subsequently refunded to you is eligible for Sched A deduction. It;s one of the advantages of the deduction over the credit: you don't need to have foreign income in that year to claim it.

Of course, if you recieved a refund in spring 2008 from your 2007 return, you would need to deduct this from your total foreign tax paid for 2008.

The only thing to watch for is triggerring AMT. Software will pick that up.

andydc · Post by **andydc** » Sun Apr 05, 2009 5:12 am

Nelson, thanks for the reply.

I did recieve a refund in spring 2008 from my 2007 return from CRA, I would have missed it in the calculation of the final available FTD if you hadn't mentioned it.

I have two more questions related to FTD,
1)is there any limit on allowed deduction in 2008? and
2) do I need to attach tax documents from CRA when I submit 1040 ?

nelsona · Post by **nelsona** » Sun Apr 05, 2009 6:10 am

No limit, but you face AMT a some point.

IRS never wants docs except ones which show IRS tax withheld (W-2 and 1099).

andydc · Post by **andydc** » Sun Apr 05, 2009 6:14 am

thanks nelson.

I am confused after reading IRS Pub 514 for 2008, at the beginning of the introduction
"If you paid or accrued foreign taxes to a foreign country on foreign source income and are subject to U.S. tax on the same income, you may be able to take either a credit or an itemized deduction for those taxes."
does it mean the foreign tax is only deductible if it is also subject to U.S. tax?

andydc · Post by **andydc** » Sun Apr 05, 2009 8:03 am

you're right that AMT did click in after I added the FTD in schedule A, turbotax did that for me automatically. I read it somewhere else that I can deduct foreign tax refunds in AMT, which would be considered income under the regular tax rules. does it mean I have to first include it as a foreign source income? but I thought the tax refund from CRA is not considered income and I am supposed to just substract it from FTD to get to the final available FTD? I am even more puzzled, please help.

nelsona · Post by **nelsona** » Sun Apr 05, 2009 2:38 pm

We're not talikng income here. AMT limits deductions. foreign income tax is a deduction, just like state tax and real estate tax.

There is a provision that foreign tax CREDITS are no longer impacted by AMT, but this doesn't apply to you.

The only reason we talked about your 2007 refund was that, in my opinion, if you are going to use foreign tax as a deduction, it best be the NET amount paid in the calendar year.