[quote="nelsona"]I neglected to mention one very important option that you have ...you could avail yourselves of Article XXV of the treaty, which, in effect, allows you to 'prepare' a 1040 like we've been outlining above, calculate an effective tax-rate, and then submit a 1040NR, reporting the US wages (and any other US income) ONLY, and paying Fed tax at the rate determined in the 'pro forma' 1040...[/quote]
Wow.. I tried this scenario just this evening and it makes quite a difference. I filled a 'pro forma' 1040EZ (hint: I actually used turbotax online, free for federal return) and used the resulting effective tax rate on my 1040NR as proposed by Nelson.
This reduces my tax burden by several hundreds.
By the way, is it chapter (2) or (4) of article XXV that should be invoked here? I've seen both mentionned here on the forum regarding this topic...
Thank you Nelson for the very valuable information!!!
Canadian TN commuting to US - how to file next year?
Moderator: Mark T Serbinski CA CPA
>>> Did you have to enter any foreign (Canadian) income or fill out form 8891?
No. I filled a very simple 1040EZ with our combined income in equivalent US dollars (wife works in canada) using just the basic exemptions for me and my wife, and the standard deduction = 16900$ on line 5 of of 1040EZ. On a regular 1040, it would be 6600$ exemptions [line42] + 10300$ [line 40]. I did not attempt to itemize my deductions. Simply used the basic one for simplicity.
If you go with this "pro forma" method, I understand (reading Nelson's posts) you can't claim the foreign tax credit: you are simply establishing a baseline to limit your tax rate *as if you were filing a MFJ in USA based on equivalent US incomes.* This also seems to confirm this approach:
extract from article XXV(4):
"For the purposes of this paragraph, The "total United States tax" shall be determined as if all the income of the individual and his spouse arose in the United States;"
I made this baseline to compute the effective tax rate very simple, as stated above and I did not entered any RRSP related information, thus no 8891 since I am not really filing the regular 1040.
>>>Also, spocket, if you don't mind, did you use calc. the effective rate using your taxable income (after deductions and exemptions)?
For the "effective rate", I did not use the "taxable income". I computed from my 'pro forma' 1040EZ as follows:
- eff tax rate = TAX [line 11] / Adjusted Gross Income [line 4] = 15.12% in my case
I used 'turbo tax' online to make this pro-forma, and in the report it generates, was a value computed for 'effective tax rate' that matched exactly the result above. Therefore I think my approach was OK.
Then I went back in my 1040NR using my sole income, and using the Tax table, and using the same formula above (line 58/line 35) it yielded an effective tax rate of 17.87%.
I understand this is where you invoke the article XXV(4) and replace the "TAX" amount in line 58 of the 1040NR by the tax rate computed in 'pro forma' times your 'adjusted gross income'.
I guess you then file a form 8833 to invoke the treaty and explain your approach to justify the value you put in line 58 rather than using the table.
I hope I did it right: not an expert here either.
No. I filled a very simple 1040EZ with our combined income in equivalent US dollars (wife works in canada) using just the basic exemptions for me and my wife, and the standard deduction = 16900$ on line 5 of of 1040EZ. On a regular 1040, it would be 6600$ exemptions [line42] + 10300$ [line 40]. I did not attempt to itemize my deductions. Simply used the basic one for simplicity.
If you go with this "pro forma" method, I understand (reading Nelson's posts) you can't claim the foreign tax credit: you are simply establishing a baseline to limit your tax rate *as if you were filing a MFJ in USA based on equivalent US incomes.* This also seems to confirm this approach:
extract from article XXV(4):
"For the purposes of this paragraph, The "total United States tax" shall be determined as if all the income of the individual and his spouse arose in the United States;"
I made this baseline to compute the effective tax rate very simple, as stated above and I did not entered any RRSP related information, thus no 8891 since I am not really filing the regular 1040.
>>>Also, spocket, if you don't mind, did you use calc. the effective rate using your taxable income (after deductions and exemptions)?
For the "effective rate", I did not use the "taxable income". I computed from my 'pro forma' 1040EZ as follows:
- eff tax rate = TAX [line 11] / Adjusted Gross Income [line 4] = 15.12% in my case
I used 'turbo tax' online to make this pro-forma, and in the report it generates, was a value computed for 'effective tax rate' that matched exactly the result above. Therefore I think my approach was OK.
Then I went back in my 1040NR using my sole income, and using the Tax table, and using the same formula above (line 58/line 35) it yielded an effective tax rate of 17.87%.
I understand this is where you invoke the article XXV(4) and replace the "TAX" amount in line 58 of the 1040NR by the tax rate computed in 'pro forma' times your 'adjusted gross income'.
I guess you then file a form 8833 to invoke the treaty and explain your approach to justify the value you put in line 58 rather than using the table.
I hope I did it right: not an expert here either.
As to appparent discrepancies with using 2555:
Don't forget that the IRS this year has changed how the exclusion works: It used tpo take your foreign income off the top, ie the highest bracket you were in. Now, it really only reduces yor tax at the effective rate, which is like the 1116 method.
I would look over your munbers though, as you shpuldn't be paying more tax when you use the exclusion.
2555 is no longer the windfall it used to be, which is why, for those with no kids, XXV(4) is the way to go.
XXV(4) is the article that soecifically outlines the procedure, the other XXV rticles merely outline the genearl non-discrim provisions in most treaties.
Don't forget that the IRS this year has changed how the exclusion works: It used tpo take your foreign income off the top, ie the highest bracket you were in. Now, it really only reduces yor tax at the effective rate, which is like the 1116 method.
I would look over your munbers though, as you shpuldn't be paying more tax when you use the exclusion.
2555 is no longer the windfall it used to be, which is why, for those with no kids, XXV(4) is the way to go.
XXV(4) is the article that soecifically outlines the procedure, the other XXV rticles merely outline the genearl non-discrim provisions in most treaties.
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
Telly:
You may also find the following posts from the old boards interesting, as they discuss the same topic about using a pro-forma 1040 to compute the tax rate then fill a 1040NR. Much of the information there is also provided by Nelson:
http://www.grasmick.com/board/?topic=topic2&msg=11821
http://www.grasmick.com/board/?topic=topic2&msg=5463
You may also find the following posts from the old boards interesting, as they discuss the same topic about using a pro-forma 1040 to compute the tax rate then fill a 1040NR. Much of the information there is also provided by Nelson:
http://www.grasmick.com/board/?topic=topic2&msg=11821
http://www.grasmick.com/board/?topic=topic2&msg=5463
Sprocket, as you pointed out earlier, the proforma for XXV(4) assumes all income comes from US, so no 2555, no 1116, no foreign income tax deduction.
the proforma is not a tax return, it is simply a method of determining a taxrate, and is only available to non-US citizen married couples maintaining Cdn residency.
The true 1040MFJ with 2555 (or even 1116) is for US citizen/residents, or those have broken or established Cdn ties mid-year.
the proforma is not a tax return, it is simply a method of determining a taxrate, and is only available to non-US citizen married couples maintaining Cdn residency.
The true 1040MFJ with 2555 (or even 1116) is for US citizen/residents, or those have broken or established Cdn ties mid-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
On a different note.. i was reading the first posts of this thread again, I stumbled onto something. It appears that although I have been contributing to a 401K plan for company match (5%+5%) since the beginning of my US employment 7 yrs ago, CRA did not make any PA on my allowable contributions as reported by Telly.
Is it because I should have declared my 401K contributions in my previous CDN tax declarations in some way for all these years? I hope not.
Or is it CRA's responsibility to realize that I contribute to a 401K by reading the copy of the W-2 I provide? If so, it seems they did not apply the 10% penalty to me (yet...)
Is it because I should have declared my 401K contributions in my previous CDN tax declarations in some way for all these years? I hope not.
Or is it CRA's responsibility to realize that I contribute to a 401K by reading the copy of the W-2 I provide? If so, it seems they did not apply the 10% penalty to me (yet...)
Telly, you make a good point. A loss susstained by the spouse not working in US should not be taken into account. But since you both worked in US, and the loss is shared, I would include it.
Don't forget, it's ALL income, cap gains, interest, dividends. Not internal RRSP income though.
Don't forget, it's ALL income, cap gains, interest, dividends. Not internal RRSP income though.
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
Sprocket, What you have done is under report your income. 401(k) contributions made by you are to be included in your wages. It is NOT upto the CRA to read your W-2. This is in the instructions.
I would go back 3 years and correct. For the previous years, I would forget about it. BUt I would also not try to claim this portion as a non-deducted contribution when it comes time to withdraw funds.
I would go back 3 years and correct. For the previous years, I would forget about it. BUt I would also not try to claim this portion as a non-deducted contribution when it comes time to withdraw funds.
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 nelsona.
I'm wondering if spocket DID declare his 401k contribution as income but did not adjust PA. I thought that the only reason PA is adjusted by 10% is when you have a pension plan (which my company, until last month, did indeed have). I think the CRA doesn't require you to reduce your PA if your company does not have a pension but matches 401k (since you received no tax benefit). This would be reported if the "retirement plan" box on your W-2 is checked. On my husband's it wasn't, on mine it was. I was planning to adjust PA for me but not for him because of this.
Again, I'm not sure...
I'm wondering if spocket DID declare his 401k contribution as income but did not adjust PA. I thought that the only reason PA is adjusted by 10% is when you have a pension plan (which my company, until last month, did indeed have). I think the CRA doesn't require you to reduce your PA if your company does not have a pension but matches 401k (since you received no tax benefit). This would be reported if the "retirement plan" box on your W-2 is checked. On my husband's it wasn't, on mine it was. I was planning to adjust PA for me but not for him because of this.
Again, I'm not sure...
I have never known of anyone who 'self-adjusts' their PA. THAT is up to the govt to do, not us.
The only time I would worry about PA is if I felt CRA made it too big. Otherwise, forget about it.
The only time I would worry about PA is if I felt CRA made it too big. Otherwise, forget about it.
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