Form 1116 (Foreign Tax Credit) Question

[speer]

Hello,

Few questions:


1) Im slightly confused on part 1 of the form. My income was self-employed foriegn sourced income (Canada). For line "1a Gross income from sources within country shown above and of the type checked above" is this my gross business income (not including expenses) or my net profit (line 12 "Business income or (loss)." on 1040)?

2) For line 2 of form 1116 "Expenses definitely related to the income on line 1a (attach statement)" What is this exactly? Is this my business expenses from part 2 on sched c? Does this include my cost of goods sold and all my other business expenses (which would essentially equate to line 12 on my 1040)? Does line 2 include my standard deduction and my single exception on my 1040?

Thanks, I really appreciate it.

[nelsona]

The "gross" income reported on 1116 is the income that contributes to your AGI on page 1 of 1004, thus it is your NET business income.
The deductions will be further down on 1116, as your software will distribute automatically. Don't do this by hand.

[speer]

Thanks nelsona,

I am filling using the voluntary disclosure program so I have to do it all on paper.

I have General category income and Passive category income. The passive income is not taxed in Canada since its in a tax sheltered account and therefore I wont be able to offset US taxes owed on my total income. Would I still be required to fill a Form 1116 for the passive income?

One other question. Im exempt from self-employed tax because of the totalziation agreement between Canada and the USA and I pay the employer and employee portion of my Canadian Pension Plan just as if I would with Social Security. The employee portion is deductible from my income on my Canadian taxes giving me a lower taxable income. Is anything paid it in to my CPP deductible on my US taxes?

[nelsona]

You can always find back-versions of tax software.

if you have no tCdn tax to report on your passive income, there is not much point to filing a 1116 passive.

Any income you report on 1040 is always gross income, before tax and cpp ei etc.
You can then include CPP, EI, and return-calculated tax on your 1116. You do not reduce your income by any of these taxes.

I'm curios that you are self-employed but have CPP being withheld. Doesn't than make you an employee?

[nelsona]

.. and any reason why you would not just use 2555 to exempt your wages/self-employment income?

And to exempt yourself from SE tax, you need a CPT letter from CRA. Do you have such?

[speer]

A lot of the tax software I tried using proved to be very precarious for expat situations, so I decided to do it all manually.

Form 2555 is inheritly less useful than Form 1116 in a high tax country (like Canada), doesnt allowed carry forwards for taxes paid and from my readings appears to be more complex than 1116. Form 2555 also does not cover passive income, which I run in to the same situation for on 1116 since I paid no tax on my passive income In Canada and cannot offset any US taxes owed on it (its literally $2.60).

>if you have no tCdn tax to report on your passive income, there is not much point to filing a 1116 passive.

Perfect. Just wanted to make sure.

>You can then include CPP, EI, and return-calculated tax on your 1116. You do not reduce your income by any of these taxes.

How exactly would I include CPP on my 1116 and what exactly would this do? Taxes paid for CPP I will have returned when I retire so I cannot claim this as a credit on 1116, unless I would somehow claiming this as a deduction? Possibly on line 2 of 1116 "Expenses definitely related to the income on line1a (attach statement)"? If so would I report the full CPP I paid or just employer portion?

Sorry, I may have been unclear on my original post. I have no CPP withheld and am self-employed. I have to pay 9.9% (employee and employer portion) of my total income in Canada. My Canadian taxes deducts the employer portion paid from my total income which determines my total taxable income and my federal and provincial taxes are calculated from this taxable income. Currently my US taxes are based off my total income in Canada not deducing any CPP I paid.

[nelsona]

There is nothing "precarious" in using the current version of s/w for 2016 and then using that as the template going backwards, expat or otherwise. It would greatly reduce these questions you are asking me which quite frankly are becoming mechanical in nature. See below.

2555 is not complex. If your foreign earned income exceeds the annual limit, then tax calculation becomes complex, but since you have no other income, I doubt that it would be that difficult.

CPP would be included in the foreign tax you paid on the income (the whole point of 1116). I think you can figure that out. It goes at the same place your Cdn and provincial tax go. Then, there is nothing to reduce your foreign income other than the standard or itemized deduction, which you would prorate for the 1116 over all income.