Applicatin

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DonMurphyCanada
Posts: 72
Joined: Sat Mar 01, 2014 11:41 pm

Applicatin

Post by DonMurphyCanada »

Canadian Citizen married US Citizen, lived and worked in the US years ago and accumulated $300,000 in 401K (Wife accumulated the same.)
Moved back to Canada in years ago.

I will be liquidating all assets including 401K in June 2021, W8Ben on file with mutual fund company.

My understanding from reading these forums is:
1) I sell the 401K for $300,000, they will withhold 30% (lump sum) June 2021. I am 55 years old 10% early withdrawal penalty applies)
2) I should file 1040NR (March 2022 - Canadian citizen living in Canada) for the $300,000 and get a sizable tax rebate back (I have other earned income and other investment gains from the liquidation of assets but these will not be reported in the US.
3) I should file a Canadian tax return and get almost a FULL credit for the tax paid in the US due to the tax treaty.

I will be hitting the 53.5% marginal tax bracket with the 401K alone, and have calculated my effective tax rate to be somewhere between 42% to 47% due to liquidation of other assets.

My question is when filing my Canadian taxes, will I get *almost* the full tax credit for the taxes paid in the US on my Canadian return? (I am particularly concerned about not getting the the 10% penalty back.)

Second question why bother doing the 1040NR at all if my tax rate in Canada is going to be so high, I will get a credit for the full 30% they with held anyway?

TIA,

Don
nelsona
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Re: Applicatin

Post by nelsona »

As you state Foreign tax credits are given at your EFFECTIVE rate, while the income is added at your MARGINAL rate.

CRA has confirmed that the penalty is eligible for the tax credit.

I would run some scenarios in tax software and see if you do get all of it credited. Remember that 401(k) (not IRA) money is eligible for pension splitting (and CRA allows the tax you pay to be split as well) this may lower your tax bill and effective rates to below 40%. It may be worth filing 1040NR to reduce the 30%. It can be treated as connected income (ie. graduated tax rate), since this would be VERY simple.

Any particular reason you are taking pension-intended money as a lump sum, rather than spread?
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DonMurphyCanada
Posts: 72
Joined: Sat Mar 01, 2014 11:41 pm

Re: Applicatin

Post by DonMurphyCanada »

As always Nelson thanks!

Unfortunately the reason is after 31 years of marriage, a divorce is in the works mainly due to an external event beyond my control (not an affair) Believe me this is not my choice i still love her to pieces.
We are trying to work this out on friendly terms so the pension splitting may work out. Would that be for a lump sum payment as well? Thanks for the tip.


When filing the 1040nr to get below the 30% what would the benefit of that be if my effective tax rate on the Canadian side is 30% or greater?


When you say that "CRA has confirmed that the penalty is eligible for the tax credit." Would i be able to find that in the us canada tax treaty or some addendum or something like that?
nelsona
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Re: Applicatin

Post by nelsona »

Your US tax is 40 percent. You are getting close to that. Your concern ios getting full credit. You might not.

AS I said. It is pretty simple to run scenarios. You seemed to have figured out your tax rate already, just plug in the foreign tax credit and see.
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nelsona
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Re: Applicatin

Post by nelsona »

Its an a memo somewhere, but it is well established/accepted fact.
You're not the first to make an early withdrawal.
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DonMurphyCanada
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Joined: Sat Mar 01, 2014 11:41 pm

Re: Applicatin

Post by DonMurphyCanada »

Well I used taxact 1040nr to plug in $305,000 US 401K lump sum distribution where a 30% withholding would be 91581.66, 10 % penalty should be 30527 for a total of 122108.


Taxact line 16 1040NR reports 81545 not 91582 I was expecting (30 %withholding). Have I entered some of the boxes incorrectly on the
Taxact is correctly adding the 10% penalty on line 23b of 30500.
Taxact is Saying my total tax bill would be 112045?

I entered :
box1 305000 (gross distribution)
box2a 305000 (taxable amount
I clicked total distribution
box4 122,109.00 (fed income tax)
I chose early distribution no known exception

Have I done something wrong or will i really get a rebfund?
nelsona
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Re: Applicatin

Post by nelsona »

As i said, this income does not need to be flat taxed, it can be graduated, and that is what the software has done.
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DonMurphyCanada
Posts: 72
Joined: Sat Mar 01, 2014 11:41 pm

Re: Applicatin

Post by DonMurphyCanada »

Nelson your valuable tip "Remember that 401(k) (not IRA) money is eligible for pension splitting (and CRA allows the tax you pay to be split as well) this may lower your tax bill and effective rates to below 40%".

I am not sure what marriage states (tax wise) the relationship apply in each country at tax time but the tickboxes I have seen are married, separated and divorced.

Is the pension splitting you refer to a US or Canadian thing and is this equally applied if you are married or separated (divorce can not be true tax state for me because we will be separated less than 1 year at tax time next year (BC Canada))


For the foreign tax credit, is it line 24 from 1024 NR (US funds) that carries forward to line 40500 (Foreign Tax Credit - CAN funds)?

Also does anyone have any past experience with when the CRA will demand their share of the 401k taxes? (The 401K distribution in June 2021 puts me in a tax bracket of close to 54% in Canada less the 40%+/- I payed in the US is a difference of about 14% in Canada which is $42000 US. When is this tax due from CRA's perspective? My understanding is if the CRA issues an instalment reminder I need to remit when that is asked for, just trying to judge the likelihood of CRA issuing an Installment reminder for this summer 2021 or if I can use those funds for aproc 7-8 months when I pay my final tax bill in ~ March 2022?
nelsona
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Re: Applicatin

Post by nelsona »

pension splitting is only a Cdn thing (thus the reference to CRA).

CRA will 'demand' their taxes when you file your return in the spring. Since this will be a one time tax hit, there will be no penalty for underestimated withholding, nor any request from CRA for installments until you file.
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nelsona
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Re: Applicatin

Post by nelsona »

Have you considered simply splitting your 401(k) as part of the settlement? Transfer (in US) to her as part of a settlement, and there is no immediate tax hit.
Or do you need these funds to buy her out?
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DonMurphyCanada
Posts: 72
Joined: Sat Mar 01, 2014 11:41 pm

Re: Applicatin

Post by DonMurphyCanada »

I pulled the trigger on this, I do need funds for buyout.

On the pension splitting there is a clause that states that we can't be separated more than 90 days in the tax year.

I did also want to report here that i did speak to the irs and was told that i will need to remit the 10% penalty to them soon (now) in the form of 'estimated tax' publication 505 page 22. In case anyone else has to go through this.

Nelson I want to thank you for your guidance, you have made this process possible for me.
nelsona
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Joined: Wed Oct 27, 2004 2:33 pm
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Re: Applicatin

Post by nelsona »

Yes, the IRS wants there money throughout the year. Not so for CRA, which was your question.
nelsona non grata. Non pro. Search previous posts. Happy Browsing :D
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