[quote="nelsona"]Yes, general income, by elimination of the others. RRSP is defined as pension.
You are probaby not doing the 1116's correctly.
It is not passive income.[/quote]
Do you have a solid reference to the IRS position that RRSP distribution is not passive income ?? It could be interpreted as such since this are dividends and interest.
In any case the 1116 tax credit (25% of the total) should be applicable to the current realized gain from RRSP (difference of the total -sum upon entering USs).
Strategy to Collapse RRSPs and reduce tax
Moderator: Mark T Serbinski CA CPA
"In any case the 1116 tax credit (25% of the total) should be applicable to the current realized gain from RRSP (difference of the total -sum upon entering USs)."
Correct. And this always results in very little of the tax being used as a credit.
The tax treaty defines RRSPs as pensions. The 1116 instructions define pensions as genral income. Since n=most pensions are investments, then saying that an RRSP is passive simply because it has interst and dividends doesn't relly hold water.
In the past, if one never used the treaty on their RRSP, the one could say that the inocme was passive. However, since clarifications in connection with rev proc 2002-23 and form 8891, it has become clear that any RRSP withdrawal, whether from an RRSP that had or did not have the election, is considered pension income and is reported on line 16.
Correct. And this always results in very little of the tax being used as a credit.
The tax treaty defines RRSPs as pensions. The 1116 instructions define pensions as genral income. Since n=most pensions are investments, then saying that an RRSP is passive simply because it has interst and dividends doesn't relly hold water.
In the past, if one never used the treaty on their RRSP, the one could say that the inocme was passive. However, since clarifications in connection with rev proc 2002-23 and form 8891, it has become clear that any RRSP withdrawal, whether from an RRSP that had or did not have the election, is considered pension income and is reported on line 16.
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
Dear Nelsona,
Indeed it seems that almost entire credit is used. I use now "general income" and you are right it makes no difference. One thing I don't quite understand is that I thought it will be neutral on my taxes. Ie Tax on gain in RRSP will be offset by the foreign tax credit.
But it seems to actually reduce the tax by about 5k (compared to if RRSP distribution and tax credit are not entered)
I am in high AMT phaseout bracket in California. The RRSP gain is close to 20k and the 25% witholding tax on 50k distribution is close to 12.5k.
The effective tax on the withdrawal seems to be more like 10-12%
Is it possible ?
[quote="excan007"][quote="nelsona"]Yes, general income, by elimination of the others. RRSP is defined as pension.
You are probaby not doing the 1116's correctly.
It is not passive income.[/quote]
Do you have a solid reference to the IRS position that RRSP distribution is not passive income ?? It could be interpreted as such since this are dividends and interest.
In any case the 1116 tax credit (25% of the total) should be applicable to the current realized gain from RRSP (difference of the total -sum upon entering USs).[/quote]
Indeed it seems that almost entire credit is used. I use now "general income" and you are right it makes no difference. One thing I don't quite understand is that I thought it will be neutral on my taxes. Ie Tax on gain in RRSP will be offset by the foreign tax credit.
But it seems to actually reduce the tax by about 5k (compared to if RRSP distribution and tax credit are not entered)
I am in high AMT phaseout bracket in California. The RRSP gain is close to 20k and the 25% witholding tax on 50k distribution is close to 12.5k.
The effective tax on the withdrawal seems to be more like 10-12%
Is it possible ?
[quote="excan007"][quote="nelsona"]Yes, general income, by elimination of the others. RRSP is defined as pension.
You are probaby not doing the 1116's correctly.
It is not passive income.[/quote]
Do you have a solid reference to the IRS position that RRSP distribution is not passive income ?? It could be interpreted as such since this are dividends and interest.
In any case the 1116 tax credit (25% of the total) should be applicable to the current realized gain from RRSP (difference of the total -sum upon entering USs).[/quote]
excanadian
I have trouble believing you are doing the 1116 form correctly. If your effective tax rate in 12%, then AT MOST half of the 25% NR tax will be used.
Add to this the fact that only a small portion of your RRSP income was taxable in US, and you should see that only 2 to 3K of the tax will be used.
Look for these problems:
Are you using the NET taxable income (20K) on the 1116, not the gross?
Is the RRSP income being correctly added to your total taxable income?
And of course, are you using tax software to calculate this. It is not advisable to do 1116 by hand.
The best way to determine what your real tax on this RRSP is as follows:
1. Prep your return without any consideration of RRSP (no income, no tax).
2. Simply add the correct RRSP amount (line 16a/b), without doing a 1116. (this should result in added tax of about 20K * your MARGINAL tax bracket, so in your case 10K or more).
3. Then add your 1116 (which should reduce your tax by about 2k from step 2).
4. Then, going back to step 2, use the NR tax as a deduction on schedule A. (usually this would result in about 6K less, but with AMT all bets are off).
Choose which result from 3 or 4 which yields lowest result.
This is all federal of course.
Add to this the fact that only a small portion of your RRSP income was taxable in US, and you should see that only 2 to 3K of the tax will be used.
Look for these problems:
Are you using the NET taxable income (20K) on the 1116, not the gross?
Is the RRSP income being correctly added to your total taxable income?
And of course, are you using tax software to calculate this. It is not advisable to do 1116 by hand.
The best way to determine what your real tax on this RRSP is as follows:
1. Prep your return without any consideration of RRSP (no income, no tax).
2. Simply add the correct RRSP amount (line 16a/b), without doing a 1116. (this should result in added tax of about 20K * your MARGINAL tax bracket, so in your case 10K or more).
3. Then add your 1116 (which should reduce your tax by about 2k from step 2).
4. Then, going back to step 2, use the NR tax as a deduction on schedule A. (usually this would result in about 6K less, but with AMT all bets are off).
Choose which result from 3 or 4 which yields lowest result.
This is all federal of course.
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
OK. When I enter the 50k ditribution from RRSP 20k taxable
(Growth since entering US)
I get a jump of 5600$ in TAX this is the 28 % AMT rate
on the 20k.
Then in foreign tax credit - "step by step" it asks for the gross income
from foreign source I enter 50k for the entire distribution
then I enter 12.5 k of the tax paid
When I enter this
I get reduction in taxes by 11401$ as compared to
no 1116 form
??
[quote="nelsona"]I have trouble believing you are doing the 1116 form correctly. If your effective tax rate in 12%, then AT MOST half of the 25% NR tax will be used.
Add to this the fact that only a small portion of your RRSP income was taxable in US, and you should see that only 2 to 3K of the tax will be used.
Look for these problems:
Are you using the NET taxable income (20K) on the 1116, not the gross?
Is the RRSP income being correctly added to your total taxable income?
And of course, are you using tax software to calculate this. It is not advisable to do 1116 by hand.
The best way to determine what your real tax on this RRSP is as follows:
1. Prep your return without any consideration of RRSP (no income, no tax).
2. Simply add the correct RRSP amount (line 16a/b), without doing a 1116. (this should result in added tax of about 20K * your MARGINAL tax bracket, so in your case 10K or more).
3. Then add your 1116 (which should reduce your tax by about 2k from step 2).
4. Then, going back to step 2, use the NR tax as a deduction on schedule A. (usually this would result in about 6K less, but with AMT all bets are off).
Choose which result from 3 or 4 which yields lowest result.
This is all federal of course.[/quote]
(Growth since entering US)
I get a jump of 5600$ in TAX this is the 28 % AMT rate
on the 20k.
Then in foreign tax credit - "step by step" it asks for the gross income
from foreign source I enter 50k for the entire distribution
then I enter 12.5 k of the tax paid
When I enter this
I get reduction in taxes by 11401$ as compared to
no 1116 form
??
[quote="nelsona"]I have trouble believing you are doing the 1116 form correctly. If your effective tax rate in 12%, then AT MOST half of the 25% NR tax will be used.
Add to this the fact that only a small portion of your RRSP income was taxable in US, and you should see that only 2 to 3K of the tax will be used.
Look for these problems:
Are you using the NET taxable income (20K) on the 1116, not the gross?
Is the RRSP income being correctly added to your total taxable income?
And of course, are you using tax software to calculate this. It is not advisable to do 1116 by hand.
The best way to determine what your real tax on this RRSP is as follows:
1. Prep your return without any consideration of RRSP (no income, no tax).
2. Simply add the correct RRSP amount (line 16a/b), without doing a 1116. (this should result in added tax of about 20K * your MARGINAL tax bracket, so in your case 10K or more).
3. Then add your 1116 (which should reduce your tax by about 2k from step 2).
4. Then, going back to step 2, use the NR tax as a deduction on schedule A. (usually this would result in about 6K less, but with AMT all bets are off).
Choose which result from 3 or 4 which yields lowest result.
This is all federal of course.[/quote]
excanadian
The "gross income" asked on 1116 is the gross TAXABLE income, before any deductions specific to this taxable income are accounted for later in the form (look down the form and you see a list of deductions that may or may not -- in this case don't-- apply do your income).
I knew that was your mistake.
I knew that was your mistake.
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
But even with that mistake, I'm surprised that it would allow you 11K of credit. Your effective rate according to you was 12%. So it should limit the credit to 12% of 50K.
If you really want to take the 50K as the definition of gross (it isn't -- but lets say it is), then somehere on the 1116 you need to deduct 30K from the income in order to arrive at what really was taxable. there isn't a plasce to do this, so the gross income is really the taxable income (line 16b).
If you really want to take the 50K as the definition of gross (it isn't -- but lets say it is), then somehere on the 1116 you need to deduct 30K from the income in order to arrive at what really was taxable. there isn't a plasce to do this, so the gross income is really the taxable income (line 16b).
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
Just trying to wrap it up.
So with 50k gross distribution of which 20k is taxable in US because of the treaty/election to defer gain the
gross foreign income on line 1b of form 1116 should be 20k
Is this correct ? Is there an IRS example or reference for this?
For the conversion rate - does one use the average CDNUSD conversion
for the tax year or the USDCDN conversion at the date of distribution ?
Or is it a choice ?
So with 50k gross distribution of which 20k is taxable in US because of the treaty/election to defer gain the
gross foreign income on line 1b of form 1116 should be 20k
Is this correct ? Is there an IRS example or reference for this?
For the conversion rate - does one use the average CDNUSD conversion
for the tax year or the USDCDN conversion at the date of distribution ?
Or is it a choice ?
excanadian
Correct.
Date of distribution for the 50K and the tax. Determination of the taxable portion (20K) is made separately based on value at time of entry, in USD at that time.
Date of distribution for the 50K and the tax. Determination of the taxable portion (20K) is made separately based on value at time of entry, in USD at that time.
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 nelsona. It all makes sense . I wish IRS provided some example for the 1 million or so Canadians living here.
One more thing The first tax return in US was in 2003 with the election. I wil just use the average USCDN exchange for 2003 for the RRSP cost basis -I would think this should be OK.
One more thing The first tax return in US was in 2003 with the election. I wil just use the average USCDN exchange for 2003 for the RRSP cost basis -I would think this should be OK.
excanadian
[quote="excan007"]Thank you nelsona. It all makes sense . I wish IRS provided some example for the 1 million or so Canadians living here.
Thank you "Nelsona" for all the information so far
I read the long and exhaustive instruction to forms 1116 for year 2010 and nowhere it says that pensions are considered "general income". Do you have a reference from IRS ? On the other hand the guide says explicitly that "annuities" are passive income. Are pensions different than annuities ? The example they give for "general income" are all income obtained in active employment,
It does not matter this year but I presume if pension was considered "passive income" for the purposes of from 1116 the RRSP distribution could offset future Canadian source investment income
I have asked TurboTax paid experts what kind of income pension is classified as for the 1116 - they took few days to answer and say say "passive". So I am still confused about this point.
Thank you "Nelsona" for all the information so far
I read the long and exhaustive instruction to forms 1116 for year 2010 and nowhere it says that pensions are considered "general income". Do you have a reference from IRS ? On the other hand the guide says explicitly that "annuities" are passive income. Are pensions different than annuities ? The example they give for "general income" are all income obtained in active employment,
It does not matter this year but I presume if pension was considered "passive income" for the purposes of from 1116 the RRSP distribution could offset future Canadian source investment income
I have asked TurboTax paid experts what kind of income pension is classified as for the 1116 - they took few days to answer and say say "passive". So I am still confused about this point.
excanadian
Pensions are general income. In earlier guides (when there were many more categories) there has been a distinction between annuities and pensions. Quite simply, general income is any thing that is not speciifically listed as passive, or in the other categories. Besides, pensions, as opposed to annuities, do arise from employment, thus fit that category.
It actually does make a difference, as you may be surprised yo know that you may have many more opportunities to generate general limit foreign income -- that is not taxed in canada -- thah you think. For example, each day you work abroad is considered foreign income, even if not taxed abroad. Also, you may work a few weeks with a Cdn comapny, if it is less than 10K, it is not taxed in Canada, but it is still considered gen limit foreign income.
I have ben filing RRSP as general limit income for over 10 years with no issue.
It actually does make a difference, as you may be surprised yo know that you may have many more opportunities to generate general limit foreign income -- that is not taxed in canada -- thah you think. For example, each day you work abroad is considered foreign income, even if not taxed abroad. Also, you may work a few weeks with a Cdn comapny, if it is less than 10K, it is not taxed in Canada, but it is still considered gen limit foreign income.
I have ben filing RRSP as general limit income for over 10 years with no issue.
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
RRSP income can only be considered passive if it was never included in any of the IRS procedures to defer taxation (ie form 8891 or its predecessors)
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