Need to File Previous retruns with IRS

[warmweather]

I am a dual Canadian and American citizen, living in Canada all my adult life. I have never filed taxes in the US but now I am planning to go to move to the USA (and I need to sponsor my wife) and I realize I need to file previous year's taxes. I called the IRS and they said I need to file 7 years.

Most of my tax returns in Canada are fairly simple, T4 - employment income, a little interest/dividend and some RRSP deductions. Only 1 year where income exceeded max allowable on form 2555

My questions are

1) I have been filling out 1040's and 2555's, essentially balancing the US tax return to 0, by using the deduction from form 2555. Is this the correct procedure
2) How do you deal with Dividend and Interest Income in form 2555. I have been adding it as 'other' income. is that correct
3) Can i deduct my RRSP contributions anywhere in the 1040, is there a way I can reduce my US income somehow via RRSP contributions?
4) 1 year i had sole proprietorship business income, can i deduct that in form 2555
5) are there any other forms that i should file along with the 7 years of returns (i have 1 form 8891, for my last year)
6) for form 8891 are you doing a separate form for each RRSP, and on line 8, do you enter the year end balance of your RRSP or leave it blank if you elect to use the tax treaty to defer US income tax on the undistributed earning of the plan

Sorry for the slew of questions but i just had to ask. Great resource. Thanks so much in advance. I really appreciate it

[nelsona]

First off, remember that only your wages are eligible for 2555, so the esclusion only applies to wages, and you have to account for other income separately.

So.
1. Probably not. 255 only reduces your wages, you have to calculate your tax owing witha differnt form.
2. No. You need to use foreign tax credir form 1116.
3. No. Not before 2009, and it would be reducing your wages (ONLY if you contributed through wok, not privately).
4. Probably, but you also would need to file schedule C
5. You need to file 8891 every year, not just last year. You also nned to file FBAR forms.
6. You need an 8891 for each account, each year it existed. I have covered 8891 elsewhere.

6 years is sufficent for IRS. I would send this to a tax pro.

[nelsona]

clrification on (3): You would only be able to exclude your self-employemnt income, filing schedule SE. Schedule C would be to report the business profits, and would require you to use foreign tax credits to reduce US tax.

[warmweather]

thanks for the speedy reply. i re-adjusted my 1040's and 2555's to exclude dividend and interest income, though the amounts are small, so my annual deductions more than offset them and thus my income on the 1040's is 0

is that the correct way? or should i use a form 1116 even if i dont need to?

and regarding the sole propretorship income, basically it was consulting income, that I have listed in my 1040 as 'business income" and completed an EZ form C. I then listed that income in 2555, which according to someone at the IRS hotline, is OK

[nelsona]

Take another look at your calculation of tax based on 2555. It is not straightforwrd. If you have 80K of wages and 10K of non-wages, your final tax will NOT be ZERO simply because 10K is less than the standard deduction. You may have to use a differnt method to calculate the tax owing.
In essece, in the example above your tax would be 10/90ths of what it would be without using 2555.

The mathod of calculating the tax for those using 2555 has cahnged at least twice during the past 10 years, so be careful for differnt years.

Also, if you have kids, don't use 2555 at all, and you will get $1000/child refundable credit every year for the past 6. Free money.

[warmweather]

thanks for the replies, I really appreciate it. I dont really make a lot of $$ and therefore cant afford professional help and the accountants i know dont have expertise in this area so it really helps a lot

Unfortunately i dont have kids, so i cant claim that deduction, but its good to know in the future

BTW - i dont really follow the math in the last example. If I use a 2555 for 80k in wages + 10k consulting/non wages, you are saying i will pay tax - that I follow. But isnt it because 10k is MORE than the standard dedcuction (not less, which is what you wrote).

What i thought is 1) Use 2555 reduction to reduce 80k in wages to 0, then 10k other income is your total income. Then use standard deductions (5400 + 3500) leaving taxable income at 1k or so.

[nelsona]

As I said, the calculation of tax is not straightforward once you use 2555. Unless you are using software, you must yse the guide specific for each year to calculate your tax.
It could be that using the alterante method yields no tax, but you would have to use the guide worksheet to figure this.

I know for instance that if your wages exceed the exemption limit (~90K) and you have othr income, you will pay tax, even if the rest of your income is less than the standard deduction (this wasn't so 5 years ago). maybe if you don't exceed the limit, and your other income is below the standard deduction, you're fine, but you only can find this by using the tax worksheet in the guide (or using year-specific tax software).

[warmweather]

thanks again.

the guide you are referring to, is that the 1040i (guide) for the specific year in question

I am getting the feeling that you reccomend not using the 2555 and instread go the tax credit route, via 1116. Any thoughts? (obviously it depends on each situation, but considering my taxes are fairly plane)

[nelsona]

That is the guide, yes.

If 2555 yields no tax (and you don't have kids) then by all means use 2555.

Whether you use 2555 or 1116 hoever I would strongly recommend using software (even online) as it is almost impossible to do these forms correctly by hand (other than if 255 TRULY yields no tax).