Pro Forma 1040 for XXV(4) calculation for US Return 2018

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nikitapunch
Posts: 13
Joined: Wed Sep 02, 2015 10:21 pm
Location: Canada

Pro Forma 1040 for XXV(4) calculation for US Return 2018

Post by nikitapunch » Sat Mar 16, 2019 8:15 pm

Hello,

I have looked at the different posts which have mentioned the use of Pro Forma.

The Pro Form detail for XXV(4) is here: http://www.irs.gov/pub/irs-trty/canatech.pdf starting on page 47.

Based on the tax changes for US citizens this may benefit me and others to use a 1040 like a US citizen but I am not certain just yet. It appears we may now be at even more of a disadvantage.

For a 1040NR and 1040 you can no longer claim a personal exemption for yourself, your spouse or dependents. In addition to this you can no longer claim job expenses (for me it was tolls). I have claimed only state and local income taxes on Schedule A of the 1040NR. For a 1040 however there are standard deduction amounts which a 1040NR does not have.

I was drafting my 1040NR only initially and noticed I will be getting way less back this year (a few hundred versus a few thousand).

This is my understanding so far from reading posts on pro forma (from nelsona mostly) so consolidating what I have seen and understood thus far which is going to be educational for others as well. I apologize if this is long.

• The goal of using a pro forma (which is optional) is to lead to a lower US tax bill
• Canadians are not bound by the non-resident rule since the treaty allows one to file exactly like an America would
• Available to non-US citizen married couples maintaining Canadian residency.
• Goal is to have a married Canadian resident pay US tax on wages at the same rate as a married US citizen (done with the knowledge that this will also be reported to Canada).
• Especially useful when the other spouse is not working or has little income
• A pro forma cannot use the standard deduction. One must itemize. This applies to both a 1040NR and a 1040.
• A pro forma rate applies only to US wages. Any other US income (like dividends etc) I would report on my 1040NR which would be taxed at the non-resident and/or treaty tax rate. Mortgage interest, property tax paid can be deducted regardless of where it is located
• Is for taxable and income and the tax and credits calculated therefrom.
• Foreign income tax paid (Canadian) is a deduction on the 1040. So tax withheld and tax paid can be deducted during the calendar year. If no tax was withheld or paid for services in Canada then one does not add this. When applicable this can be entered on the pro form 1040 Schedule A as a deduction as foreign tax paid. (One does not use Form 2555 for foreign earned income due to the pro forma)
• Foreign tax credits are excluded from a pro forma calculation. Makes sense. We are deducting them above.
• The treaty article overrides AMT (Alternative Minimum Tax). Any AMT calculated on the 1040NR is superceded by what is calculated on the pro forma.
• One will need to fill out a complete 1040NR and override the tax with the RATE calculated in the pro forma.

Background: I live in Canada and work in the US. I commute to the US daily and then back. Both me and my husband are Canadians. Our 2 children are dual (US and Canadian) as my children were born in the U.S. My husband does not work (Canada or US) and has received very little income from non-employers (under 2G) and has no forms.

There are 3 choices I have.
1. 1040NR – reporting only US-source income
2. 1040 – reporting world income
3. If married report on a 1040NR on which I report only US income but calculate the tax rate on that income using a 1040 (married filing jointly)

The third option appeals to me.

If option 3 is used this is what I also understand so far:

• I can write ‘Pro Forma 1040 for XXV(4) calculation’ on a 1040.
• Include IRS Form 8833 (Treaty-Based Return Position Disclosure) to make the IRS aware of what I am doing. No box has to be checked but the treaty provision can be written here and then a description of what I am doing.
• Include a completed 1040NR and override the tax with the RATE calculated in the pro forma 1040 from line 15 (total tax) in the 2018 1040.
• Put a cross through the entire bottom of the 1040 page after line 15. It does not need to be completed.
• If there are dividends and interest (from US stock investments) those can go on the 1040NR as they usually do on schedule NEC and ‘Other taxes’ section as those would still need to be calculated at the treaty rate.

I also trialed the 1040NR and 1040. On both I calculated the child tax credit for my children who are US citizens with a SSN.

On Schedule A I went ahead and added my state taxes from my W-2 and property taxes (Canadian residence).

Here are my questions.
1. After I have calculated the total tax from line 15 of the 1040 where does it go on the 1040NR?

I am a bit stuck on where it goes. I think it goes on line 42 but I am not sure.

If line 42 then I continue on. Line 45 stays the same as nothing else gets added at this point.
But then I have the child tax credit line number again on the 1040NR line 49. By assumption I believe I would not do this again (I did it on the 1040) and just leave it blank. Or alternatively I think I could have not done it on the 1040 and just do it on the 1040NR for the child credit. I don’t know if there is a benefit to do it one way or the other.

2. Does a Canadian return need to be included when submitting to the IRS?

3. Because the return is being filed as married filing jointly does this mean that my spouse also needs to complete a pro forma 1040 and even a 1040NR?

My husband may not need to file a Canadian return this year but if someone can provide the expectation whether one files one or not that would be appreciated.
4. Does the Ontario Health Premium count to be included as a deduction? This might be a stupid question. I believe no because it is not looked at as a tax even thought a fee was paid on Revenue Canada paperwork.

5. Do I need to worry about FBAR or FATCA if I use the 1040 or is this purely documentation based on proforma XXV(4). I think this is a no but I want to double check.

6. Does FICA (Social Security tax) and Medicare tax get taken into account anywhere?

7. On a 1040NR dividends get a treaty rate and bank interest 0% with the treaty exemption on a 1040NR. Capital gains and losses for NEC (not effectively connected) income coming from investments (like a 1099-B, not from real estate) I expect to not be reported on a 1040NR due to treaty article (paragraph 4 of article XIII) that it is only taxed in the country you reside and residency rule of not being in the US 183 days or more. I called the IRS a couple of times to get an answer for this on the 1040NR. Real estate might be a different story.

Following this I also treat the gain entry the same way on the 1040NR and omit entering a gain anywhere on the 1040 just like a dividend or interest for a non resident.

If I am wrong by this assumption let me know but I think I am on the right track.
8. Regarding what I mentioned. The treaty article overrides AMT (Alternative Minimum Tax). Any AMT calculated on the 1040NR is superceded by what is calculated on the pro forma. This does not apply to me currently but does this mean that a calculated AMT on the pro forma is then just carried over to the 1040 line item for AMT?

9. Can I amend previous tax years with a pro forma?

10. Worldwide income – I understand this to be income coming in from Canada or another location (including US income) for both me and my spouse when filing jointly.

Basically any income source I would expect to report to Revenue Canada including CPP or anything else applicable.

Everything made goes on the pro forma as US-sourced income. So the last question here is if there is other worldwide income then looking at the 1040 form this would then go on pro forma 1040 Line 1 wages, salaries, correct?

Thank you.

nikitapunch
Posts: 13
Joined: Wed Sep 02, 2015 10:21 pm
Location: Canada

Re: Pro Forma 1040 for XXV(4) calculation for US Return 2018

Post by nikitapunch » Sun Mar 17, 2019 12:35 pm

Please disregard questions 1 to 4 which I had.

#1. This was answered in another post for Article XXV for Canadian Residents as to where to put and calculate.

#2 - I have not seen any references to including a Canadian return on any pro forma posts I have come across so I will take that as a no.

#3. Question was if return is being filed as married filing jointly does this mean that my spouse also needs to complete a pro forma 1040 and even a 1040NR. From what I am seeing one person files it and in my case only one of us works in the US.

#4. Ontario Health Premium. This is a tax usually deducted from someone from one's pay for those working in Canada. Based on this then as a tax I can deduct it on Schedule A for the pro forma 1040.

If my other questions can be answered that would be great. Assessing to do pro forma this year which is a change I am concerned about not doing something right or not including something I should have.

Questions 5, 6, and 9 I had are more of a focus for me. The others as well but capital gains and AMT (#7 and 8) doesn't apply to me right now but I asked them as they are good to know questions which could apply later.

Bubba Gums
Posts: 23
Joined: Tue Jul 15, 2014 7:20 am

Re: Pro Forma 1040 for XXV(4) calculation for US Return 2018

Post by Bubba Gums » Sun Mar 17, 2019 1:43 pm

You can no longer deduct foreign taxes you paid on real estate.

nikitapunch
Posts: 13
Joined: Wed Sep 02, 2015 10:21 pm
Location: Canada

Re: Pro Forma 1040 for XXV(4) calculation for US Return 2018

Post by nikitapunch » Sun Mar 17, 2019 2:09 pm

You mean I can't deduct property taxes on my home in Canada on my pro forma 1040 Schedule A?

Bubba Gums
Posts: 23
Joined: Tue Jul 15, 2014 7:20 am

Re: Pro Forma 1040 for XXV(4) calculation for US Return 2018

Post by Bubba Gums » Sun Mar 17, 2019 2:22 pm

You may not deduct a property tax on your home in Canada on any schedule.

Your Ontario health premium is not a medical expense.

nikitapunch
Posts: 13
Joined: Wed Sep 02, 2015 10:21 pm
Location: Canada

Re: Pro Forma 1040 for XXV(4) calculation for US Return 2018

Post by nikitapunch » Sun Mar 17, 2019 2:43 pm

The Ontario health premium I am looking at as a tax paid to take as a deduction on a pro forma 1040. Not as medical expense.

For property tax (I had this printed out a while ago) from a post I saw for (Canadian TN commuting to US - how to file next year?) I have part of the URL (viewtopic.php?t+1597... on my printout but the post appears to no longer be on the site. I had included this in my summary before I followed with questions.

In this post there is a response from nelsona on Friday Jan. 26, 2007: The morgage interst and property taxes on your home are deductible regardless of where it is. This is only for pro forma 1040 to calculate my tax rate on the 1040NR.

I know things can change over time and they have.

So when you say I cannot deduct property taxes on my home in Canada on any schedule (this I know and only that it is referenced on an ON-BEN) you are saying that this cannot be done anymore on a US tax return? My focus is the US pro forma tax return. I was going by the post I had found in the past.

nikitapunch
Posts: 13
Joined: Wed Sep 02, 2015 10:21 pm
Location: Canada

Re: Pro Forma 1040 for XXV(4) calculation for US Return 2018

Post by nikitapunch » Mon Mar 18, 2019 8:09 am

Bubba Gums - I am glad you brought up the foreign property taxes. I do now see that foreign property taxes will not be eligible for deduction as this came about with the 2018 tax changes.

With regard to the Ontario health premium I am looking at as a tax paid can a deduction be taken for this on the pro forma 1040? There is a section for other taxes on their schedule A which does say: Include on this line income taxes you paid to a foreign country and generation skipping tax (GST) imposed on certain income distributions.

Can I add it or is that a no-no?

Does anyone know?

nelsona
Posts: 15642
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Re: Pro Forma 1040 for XXV(4) calculation for US Return 2018

Post by nelsona » Mon Mar 25, 2019 3:04 pm

Nikita, there are a few conclusions that you have made that are incorrect.
First, the fact that Cdns are not "bound by non-resident rule" has nothing to do with using 1040 pro forma. it is a separate clause in the treaty.
Second, the 1040 pro forma CAN INDEED use the standard deduction. why would you conclude otherwise? It is the 1040NR that must have only itemized deductions.
I would not say that AMT is overridden by this provision.
As was brought out, foreign property tax (real estate tax) is no longer deductible, if you are bothering to itemize.
Interest would not be reported on 1040NR (it would be included on your pro forma to come up with rate) as it is not taxable to non-residents, even if paid by US bank.
There should be no need for an 8833, since 1040NR has you describe that you are non-resident, and the indication on the pro forma 1040 that it is for treaty purposes is sufficient.
The reason one cannot use foreign tax credits has nothing to do with whether foreign tax was used as a deduction. The reason that one cannot use 1116 (or, for that matter 2555) is that the treaty states that to use this pro forma, all income is treated as arising in US. One can use foreign tax paid in the tax year as a deduction (again, if you bother to itemize) because, generally, it is not required to be based on foreign-sourced income, it just has to be legally collected tax.

The "tax" calculated on 1040 is meaningless, other than to determine the tax RATE for your 1040NR income. It doesn't go on the 1040NR, the RATE (line 12/line 11) on 1040NR instead of the table value.
For this year's 1040NR, your line 41 taxable income is multiplied by the rate you got on your pro forma
So, now to your questions:
1. See above, that is not how the tax is determined.
2. No. Nothing but your W-2 is submitted.
3. he would only do so, if he too was using the treaty.
4. In my opinion, the health premium is a foreign tax, since it is based on income. It meets the IRS definition of foreign tax.
5. no
6. FICA is a foreign tax included on your Cdn return when determining your foreign tax credit.
7. Correct. Real estate gains would be connected income. Non-real estate would not go on 1040NR.
Your comment of not including gains on 1040 pro forma are incorrect however. ALL INCOME IS REPORTED AND CONSIDERED TO BE US-SOURCED on your 1040.
8. I wouldn't worry about it, but the AMT would be calculated on 1040NR.
9. Yes, 3 years, you would then have to amend your Cdn return to reduce your foreign tax credit.
10. ALL WORLD INCOME goes on your 1040 pro forma, based on whether IRS says it is taxable, not CRA, and NOT treaty.

One caution is to not go crazy in trying to reduce your US tax. Once you reach a certain point, you are simply shifting the tax from US to Ontario. I would think simply reporting all income on pro forma, taking the standard deduction, and then filling out the 1040NR, including the child tax credit, and using the new tax rate would suffice.
Nelsona Non grata. Non pro. Search previous posts. Taking period between now and June off. Will only answer sporadically.

nelsona
Posts: 15642
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Re: Pro Forma 1040 for XXV(3) calculation for US Return 2018

Post by nelsona » Mon Mar 25, 2019 3:08 pm

And by the way, the treaty Article is XXV(3), not (4).
Nelsona Non grata. Non pro. Search previous posts. Taking period between now and June off. Will only answer sporadically.

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