1116 and 2555 question. Thanks

[fordtaurus]

Hi, Nelsona

I filed extension so now my new deadline to file US tax is approaching. I have filed Canadian tax return (I have a question about T1161 in another thread). Yes, I am lazy. Well, actually I have had most part done already. I am using H&R Block software.

I filed NR73, and CRA said my departure date should be July 1st 2009.

When I was playing with the H&R Block software, I found when I did not report Canadian income, nor tax, I would get $7000 refund.
When I used 2555 and 1116 to report the income and tax I paid in Canada as credit, I would get even more refund, around $10000.

Is this possible? I thought US goverment probably would not ask me to pay tax for my Canadian side income if I have already paid enough, but getting more refund sounds too good to be true.

BTW, I will file as "married filing jointly" with my wife, do I need to create separate 1116 and 2555 for her? It looks impossible to do this in the software.

Thanks a lot

[nelsona]

I don't answer software questions. However unless you report your TOTAL world income, you cannot file a joint tax return, so you are probably better off reporting your Cdn income, and then claiming the exclusion on 2555 for both your wages.

The 2555 instructions will tell you how to report joint income.

of course, if you use 2555, you cannot claim any Cdn tax as a credit towords that income, since the income has been excluded.

[fordtaurus]

[quote="nelsona"]I don't answer software questions. However unless you report your TOTAL world income, you cannot file a joint tax return, so you are probably better off reporting your Cdn income, and then claiming the exclusion on 2555 for both your wages.

The 2555 instructions will tell you how to report joint income.

of course, if you use 2555, you cannot claim any Cdn tax as a credit towords that income, since the income has been excluded.[/quote]

Thanks.

If I only use 2555EZ to report income, the refund would be around $2600. Looks like I have to pay $4400 tax even I paid tax in Canada already and the income has not been excluded.

[nelsona]

What you should look at is the tax you would pay if you file MFS, that is your only other choice.

[fordtaurus]

[quote="nelsona"]What you should look at is the tax you would pay if you file MFS, that is your only other choice.[/quote]

Or like you said, I can report all world income. Where should I report my Canadian income? on 1040? Thanks

[nelsona]

As i was saying, there is no point calculating an MFS return without incuding your Cdn income, as this is not allowed, so your choices are:

1. Each file an dual-status 1040NR/1040 reporting only US-source income from before July 1, and all world income from after July 1.
2. Both file a MFJ 1040 reporting ALL world income from entire year, and use 1116 to take credit for Cdn taxes paid.
3. Both file a MFJ 1040 reporting ALL world income from entire year, but excluding wages using 2555, and taking credit for Cdn tax paid on Cdn non-wages (interst, cap gains, etc). using 1116.

the Cdn income gets reported as it would if earned in US: wages on the wages line, interest on schedule B, cap gains on schedule D, etc.

[nelsona]

it is by comparing 1, 2 , and 3 that you determine the best way to file, not by comparing between including Cdn income and not including Cdn income.

[fordtaurus]

Thanks Nelsona, I will give it a try tonight.

Really really appreciate your help! Have a good day.

[flyingfish]

Can I put my line 1 in W-2 (Wages) to CRA's line 256 as Additional deductions ?

I paid 20K tax withhould in USA, but CRA's federal tax is 4K more than that. How can I reduce it?

[nelsona]

No. You cannot deduct the US income, since you live in canada.


You need to fill in a 1040NR and state return to figure out your final US taxes. Then use this, along with SS and medicare as foreign tax credit on your Cdn return.