Foreign Tax owed versus paid

genex · Post by **genex** » Mon Mar 12, 2012 10:40 pm

Hello,

I have a question about the amounts that could be included as foreign tax that we could claim as foreign tax paid in our T2209 form. I have gone through a few posts here, but not able to ascertain this. Please advice.

In my case, I had worked on TN in US for about 4 months from Sept to Dec. I filed a MFJ 1040 return. I had put about 600 USD in a traditional IRA and was able to get full refund on my US fed tax return i.e. paid zero Total Tax eventually because of this contribution. Although my effective tax rate was 10% since my total income in US was about 20000 only in those 4 months.

Now I am doing my Canadian tax return and I know that I am to include the Social Security taxes and Medicare taxes. I wanted to ensure what else from below I could add or not add:
1) The effective Tax of about 300 USD @ 10% on the taxable income from line 44 or 46 in 1040.
2) the state tax that I paid, which was about 500 USD.

I understand that I have to submit the copies of the 1040 and W2 along with my return. Not sure if the state return copy to be included (this only if I could include 500 USD state tax as foreign tax paid).

Thank you very much in advance.

nelsona · Post by **nelsona** » Mon Mar 12, 2012 11:25 pm

The only fed tax you can claim is what you calculated on your tax returns.
You do get to include any fed and state tax you calculated, as well as any fica you paid.

If, by whatever means you had availabale, you reduced your US tax to nil, CRA thanks you, as they will take all of it themselves.

lesson learned: don't do anything to reduce your US taxable income.

Now you have an IRA that is taxable in US, and you got no deduction for it.

nelsona · Post by **nelsona** » Mon Mar 12, 2012 11:31 pm

Your effective taxrate was ZERO; there is no other way to calculate this.

taxquestion · Post by **taxquestion** » Tue Mar 13, 2012 12:58 am

Hi, I have some questions.
1.when claim foreign tax credit,
Non-business income tax paid to a foreign contry should be:
Fed tax + state tax + social security tax + medicare tax

Net foreign non-business income should be: the net income from 1040NR

Is that right?

2. In 1040NR, could I claim the Standard deduction?

nelsona · Post by **nelsona** » Tue Mar 13, 2012 7:31 am

The net foreign income is the income you reported on your Cdn return, nit what was reported on your 1040NR.. They are probably the same, but do not have to be.

Your income is determined on your Cdn return for the foreign tax credit.

taxquestion · Post by **taxquestion** » Tue Mar 13, 2012 10:29 am

Non-business income tax paid to a foreign contry should be:
Fed tax + state tax + social security tax + medicare tax

is that right?

nelsona · Post by **nelsona** » Tue Mar 13, 2012 10:40 am

I already answered that in this thread.

genex · Post by **genex** » Tue Mar 13, 2012 11:09 pm

Hi Nelsona,

Thank you for responce to my query above.

One clarification when you said, not to do anything to reduce our US taxable income-> does it mean that the Net Foreign non-business income that we use to calculate the percentage of Canadian basic federal tax (that can be claimed back as FTC) is actually the US taxable income. So it is not the total income from our W2 in US? In case it is US taxable income only, then we have to deduct the standard deduction and other exemptions also from total W2 wages to arrive at that figure.

taxquestion · Post by **taxquestion** » Tue Mar 13, 2012 11:22 pm

Non-business income tax paid to a foreign contry should be:
Fed tax + state tax + social security tax + medicare tax

is that right?

nelsona · Post by **nelsona** » Wed Mar 14, 2012 7:25 am

genex,

No. I was referring to any strategy to reduce your US tax is not generally worth it.

For the purposes of your foreign tax credit calculation, the net income that you will show is your ENTIRE wages that you report on your Cdn tax return, previous to any reductions taxes etc. (lines 100-150) Don't be confused by the word "net." For wage earners, there is rarely anyy differnce between gross and net

Only items from lines from lines 200-260 which apply to your foreign income would reduce your gross (example :you contributed to a 401(k) which would be taxdeductible on your Cdn return.)

nelsona · Post by **nelsona** » Wed Mar 14, 2012 7:26 am

taxquestion, please reread this and several other threads for this answer.

Don't repeat, I can read once and have answered your question already in this thread. You are wasting my time.

genex · Post by **genex** » Wed Mar 14, 2012 12:48 pm

Hi Nelsona,

I was a resident of Canada for tax purposes for full year.

Seems my direct question would be, do I have to reduce the amount of IRA (that i invested in USA) from the foreign income that I put on line 433?
I am putting the income from line 236, i.e. all I earned from US and Canada in denominator (i.e. net income).
I understood already about the basic federal tax, which in my case would be the state tax payable+SS+medicare- so I am fine on that point.

Thank you.

nelsona · Post by **nelsona** » Wed Mar 14, 2012 2:49 pm

No, because you did not deduct it on your Cdn return. Everything for the foreign tax credit calculation comes from your Cdn return. IRA does not qualify a s a pension plan for this purpose.

if you eraned $100K in US as wages, and had $120K net income, your equation is

100/120 * basic tax

taxquestion · Post by **taxquestion** » Wed Mar 14, 2012 9:18 pm

Sorry, That was mistake, I just refreshed this page.
What is MFJ 1040, I just found 1040NR.
It's said that I cannt claim the standard deduction on 1040 NR.
Is that right? (yes/no question, it's more clear for me)

Thanks.