Hi,
We were originally planning to return to Canada this month but had to delay a few months. My wife has stopped working and we were planning on converting her 401K savings to Roth before leaving. Now that our move is getting pushed so close to the end of the year, I'm wondering if there are any tax advantages in delaying further.
If we execute the conversion in Jan 2012 and move back very shortly after, wouldn't that lower my taxes due on the conversion if I also file 1040-NR for 2012? I read somewhere here about a 15% flat tax on pension income which would be all I really report for 2012.
I'd have to check to be sure but I can't see how I'm not paying more then 15% on these funds if I do the conversion this year.
Thanks!
Roth Conversion Taxes
Moderator: Mark T Serbinski CA CPA
You might reduce your US, howver it would not be because of filing 1040NR.
Since you would not be Cdn resident when you file, the money would be taken out as a US resident, and reportable on the 1040 portion of your 2012 return. You would not claim it as unconnected income by a non-resident, because you weren't non-resident.
Besids, in 2012, you will face the same choice as in 2011 as to how you will file in US. Most likley you will file a full-year 1010, excluding your Cdn income or taking tax credit, so, you wouldeffectively only pay US tax on your conversion, which would likle tresult in lower tax than if reported this year on top of all your US wages, etc.
I have always suggested that Cdn returness do this (taking the money in january before leaving) -- even when they were collpsing their 401(k) and taking the money.
Good plan, but not for the reason you suggest.
Since you would not be Cdn resident when you file, the money would be taken out as a US resident, and reportable on the 1040 portion of your 2012 return. You would not claim it as unconnected income by a non-resident, because you weren't non-resident.
Besids, in 2012, you will face the same choice as in 2011 as to how you will file in US. Most likley you will file a full-year 1010, excluding your Cdn income or taking tax credit, so, you wouldeffectively only pay US tax on your conversion, which would likle tresult in lower tax than if reported this year on top of all your US wages, etc.
I have always suggested that Cdn returness do this (taking the money in january before leaving) -- even when they were collpsing their 401(k) and taking the money.
Good plan, but not for the reason you suggest.
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
I did some paper napkin calculations and waiting does indeed seem to reduce the taxes significantly.
I have one point of confusion regarding the Foreign Earned Income exclusion. In a scenario where income exceeds the limit can tax credits be claimed against the taxes due on remaining income ? For example, foreign income is 120 K, FEIE wipes out ~90 K leaving ~ 30 K to report and pay taxes of X on. Can a portion of the canadian taxes paid on the 120 K be used as a credit against X?
I have one point of confusion regarding the Foreign Earned Income exclusion. In a scenario where income exceeds the limit can tax credits be claimed against the taxes due on remaining income ? For example, foreign income is 120 K, FEIE wipes out ~90 K leaving ~ 30 K to report and pay taxes of X on. Can a portion of the canadian taxes paid on the 120 K be used as a credit against X?
I see now that using the foreign income exclusion doesn't take income off the top brackets first which invalidated my initial calculation.
I think I still come out ahead though on a full year 1040 using FTC for 2012. I estimated my U.S tax liability on Canadian Income + Roth Conversion and multiplied that by Canadian Income / (Canadian Income + Roth Conversion) to figure maximum allowed FTC credit.
That was roughly equal to my canadian tax payable. After applying that credit to my U.S tax liability ,the remaining portion is smaller then what I'd pay on the funds if I convert this year.
I'm just wondering if there any other FTC limit/issues that might affect this...
I think I still come out ahead though on a full year 1040 using FTC for 2012. I estimated my U.S tax liability on Canadian Income + Roth Conversion and multiplied that by Canadian Income / (Canadian Income + Roth Conversion) to figure maximum allowed FTC credit.
That was roughly equal to my canadian tax payable. After applying that credit to my U.S tax liability ,the remaining portion is smaller then what I'd pay on the funds if I convert this year.
I'm just wondering if there any other FTC limit/issues that might affect this...
You are correct that, if your income excceds the FEIE limit by more than your personal dedecution/exemptions, the tax calculation is a MIX of rates, not just the lowest ones.
However, I still think you will find that delaying the convesion til next year is the best choice (unless you think you will make MUCH MUCH more other income in 2012 than in 2011.
And if FEIE isn't working for you in 2012, you can always use FTC instead on the entire Cdn wages.
However, I still think you will find that delaying the convesion til next year is the best choice (unless you think you will make MUCH MUCH more other income in 2012 than in 2011.
And if FEIE isn't working for you in 2012, you can always use FTC instead on the entire Cdn wages.
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
Thanks. I did run one other scenario which is to just do a regular dual status filing.
If I understand how that works correctly, the effect is that her Roth conversion is taxed at Married Filing Separately rates with no deductions. That seems to work out cheapest because much of the conversion is covered by the lower brackets. Any income she receives after the conversion is after becoming non-resident, not connected to U.S and not taxed in U.S
Does that make sense or am I confused again? I didn't expect this to be the best way to go about it.
If I understand how that works correctly, the effect is that her Roth conversion is taxed at Married Filing Separately rates with no deductions. That seems to work out cheapest because much of the conversion is covered by the lower brackets. Any income she receives after the conversion is after becoming non-resident, not connected to U.S and not taxed in U.S
Does that make sense or am I confused again? I didn't expect this to be the best way to go about it.
Dual status MFS is another way, You're the one running scenarios, so i do not know what your various incomes will be for either of you. it will be an option next year, which you will not have if she converts this year. Dual status this year would guarantee very high taxrate for both of you on all your incomes, including the conversion.
The idea is to isolate your Roth from as much other US-sourced income as possible.
Btw, even on dual-status, she would be able to claim many itemized deductions on her 1040NR.
The idea is to isolate your Roth from as much other US-sourced income as possible.
Btw, even on dual-status, she would be able to claim many itemized deductions on her 1040NR.
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. The 'dual status' scenario was intended for 2012 with conversion made eariy in 2012 and no other U.S taxable income received in 2012. I wouldn't consider the dual status return for 2011 even if we do wind up converting and leaving in 2011.
To your point , the idea is to isolate the roth from other US sourced income. In her case, this is easily done by converting in early 2012 and filing dual status. If we can still itemize a few deductions, take exemptions..etc that only makes it better!
Thanks again. I think I've got enough understanding of all of this now to make the decision on waiting to leave.
To your point , the idea is to isolate the roth from other US sourced income. In her case, this is easily done by converting in early 2012 and filing dual status. If we can still itemize a few deductions, take exemptions..etc that only makes it better!
Thanks again. I think I've got enough understanding of all of this now to make the decision on waiting to leave.
Remeber too, that it need not be all or nothing. If, say, you have 300K in 401(k), cash balance,etc. You could convert, say 80K to stay in the lower tax bracket, an d keep the rest in IRA. the jump in tax between brackets is substantial. something to consider. It may be hard to come up wit h100K in taxes.
You might become US resident again later, or you would kekep this IRA until retirement, cashing it in slowly at low tax rate.
if it is less than 80K though, its a no brainer.
You might become US resident again later, or you would kekep this IRA until retirement, cashing it in slowly at low tax rate.
if it is less than 80K though, its a no brainer.
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
Good point.
I'm still very motivated to try and convert all before moving back. I don't know if I'll ever get another chance and I really believe this a gold-mine opportunity for returning Canadians.
After reading the Pub 519 3 times, I still can't figure out how many exemptions she'd be able to claim on a dual status return.
In the 'departing US' dual status scenario, is it correct to say that you use 1040 to report worldwide income for period while resident, transfer that income to a 1040NR, add other effectively connected income for period while non-resident and are then subject to the non-resident permissible exemptions & deductions on the iump sum?
I'm still very motivated to try and convert all before moving back. I don't know if I'll ever get another chance and I really believe this a gold-mine opportunity for returning Canadians.
After reading the Pub 519 3 times, I still can't figure out how many exemptions she'd be able to claim on a dual status return.
In the 'departing US' dual status scenario, is it correct to say that you use 1040 to report worldwide income for period while resident, transfer that income to a 1040NR, add other effectively connected income for period while non-resident and are then subject to the non-resident permissible exemptions & deductions on the iump sum?
Good point.
I'm still very motivated to try and convert all before moving back. I don't know if I'll ever get another chance and I really believe this a gold-mine opportunity for returning Canadians.
After reading the Pub 519 3 times, I still can't figure out how many exemptions she'd be able to claim on a dual status return.
In the 'departing US' dual status scenario, is it correct to say that you use 1040 to report worldwide income for period while resident, transfer that income to a 1040NR, add other effectively connected income for period while non-resident and are then subject to the non-resident permissible exemptions & deductions on the iump sum?
I'm still very motivated to try and convert all before moving back. I don't know if I'll ever get another chance and I really believe this a gold-mine opportunity for returning Canadians.
After reading the Pub 519 3 times, I still can't figure out how many exemptions she'd be able to claim on a dual status return.
In the 'departing US' dual status scenario, is it correct to say that you use 1040 to report worldwide income for period while resident, transfer that income to a 1040NR, add other effectively connected income for period while non-resident and are then subject to the non-resident permissible exemptions & deductions on the iump sum?
Just when I think I understand it.. I read this on IRS site.
[i]
A Dual Status Alien may claim all the same personal exemptions which are allowed to a U.S. Citizen for that portion of the year in which he is a Resident Alien; but he may claim only the exemptions allowed to Nonresident Aliens as explained above for that portion of the year in which he is a Nonresident Alien.
[/i]
To me that implies your taxable income from resident period is reduced by exemptions permissible to residents whereas the non-resident period is treated differently. I also don't understand why you get a full exemption when you aren't there a full year. Shouldn't it be prorated or something?
My understanding of the dual status filing still doesn't seem correct because I thought N.R rules get applied to the total of world wide income during residency period + effectively connected income during non-resident period.
Anyway, I've taken up enough of your time. I will muddle through it one way or another :)
[i]
A Dual Status Alien may claim all the same personal exemptions which are allowed to a U.S. Citizen for that portion of the year in which he is a Resident Alien; but he may claim only the exemptions allowed to Nonresident Aliens as explained above for that portion of the year in which he is a Nonresident Alien.
[/i]
To me that implies your taxable income from resident period is reduced by exemptions permissible to residents whereas the non-resident period is treated differently. I also don't understand why you get a full exemption when you aren't there a full year. Shouldn't it be prorated or something?
My understanding of the dual status filing still doesn't seem correct because I thought N.R rules get applied to the total of world wide income during residency period + effectively connected income during non-resident period.
Anyway, I've taken up enough of your time. I will muddle through it one way or another :)
If you are in US for the first six months, you get to claim 'normal' deductions occuring in that period.
You are thinking of the prorating that canada does. IRS does not do this, becuase they don't operte on the concept that taxation can begin or end during the year.
You are thinking of the prorating that canada does. IRS does not do this, becuase they don't operte on the concept that taxation can begin or end during the year.
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