Avoiding double tax on Cdn income as emigrant to US

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victory
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Joined: Sat Mar 21, 2020 9:07 pm

Avoiding double tax on Cdn income as emigrant to US

Post by victory » Sat Mar 21, 2020 11:21 pm

I'm a TN visa holder that emigrated from Canada on 2019/01/29 to the US. Even though I quit my job in Canada in Dec 2018, I received my last (Canadian) paycheck in Jan 2019, and hence have taxable Canadian wage income for 2019; I'm trying to figure out the best way to avoid or minimize IRS taxes on wage income that I've already paid taxes to the CRA for in 2019.

Relevant info: I'm single, have no spouse or dependents, and am considered to be a resident alien by the IRS due to the SPT. Spent 29/365 days of the year in Canada, the rest in the US.

2019 T1:
- line 26000: CAD$ 15,240 (taxable income - this is purely wage income that I received on a T4, work that I did while I was physically present in Canada for a Canadian corp)
- line 43500: CAD$ 2,520 (total payable)

To the best of my understanding, these are my options. Please correct me if I'm wrong!

1. File a dual status return. Exclude all income reported on my T1 on my dual-status return (1040), and have 0's across the board on my dual-status statement (1040NR) due to otherwise not having any income effectively connected with US trade/business during my 29-day period of residency in Canada. This unfortunately means that I cannot claim the standard deduction of $12.2k on my 1040, and can only claim $10k in itemized deductions from state income tax, so I would have $2,200 higher taxable income if I went with a dual status return, vs not having this Canadian wage income to begin with.

2. 1040 + 2555 to claim the FEIE. However, because I left early on during the tax year, only 29 days in, I won't be able to have my entire Canadian wage be excluded via the FEIE. (29/365)*105,900 (FEIE max) = $8414. CAD$ 15,240 / 1.327 (annual exchange rate per IRS) = $11,485. So I would have $3,071 higher taxable income with this option, vs not having this Canadian wage income to begin with.

Also, I don't understand how this option applies to me. I've seen a number of posts elsewhere on this forum that recommends the use of the FEIE to exclude Canadian wage income as an emigrant filing a first-year IRS return, but I don't understand how emigrants like me pass either the Bona Fide Residence Test or the Physical Presence Test. If I file a 1040 for 2019, I claim to be a US tax resident - how can I claim to be a bona fide resident of Canada so I can claim the FEIE?

3. 1040 + 1116 to claim a FTC for the taxes I've already paid to the CRA. I have enough US sourced income and taxes paid that my Form 1116 line 21 (maximum amount of credit) is higher than the CAD$ 2,520 I've paid in taxes on my T1, so I can claim all of it as a FTC. But 2,520/15,240 = a 16.5% effective rate on my T1, while I would be paying a marginal rate of 24%(fed) + 9.3%(CA state) on an additional $11,485 of income on my 1040. This, by far, seems like the least effective option here (roughly $1,900 in additional taxes, vs not having this Canadian wage income to begin with).

Do I have any other options at this point? What else can I do to minimize the amount of US tax liability I incur by having this Canadian wage income during 2019? Thanks!

nelsona
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Re: Avoiding double tax on Cdn income as emigrant to US

Post by nelsona » Mon Mar 23, 2020 8:07 pm

#3 is best.
Nelsona Non grata. Non pro. Search previous posts. Happy Browsing :D

victory
Posts: 2
Joined: Sat Mar 21, 2020 9:07 pm

Re: Avoiding double tax on Cdn income as emigrant to US

Post by victory » Mon Mar 23, 2020 8:37 pm

Thanks for the reply nelsona!

Can you describe why #3 is best? I'm not sure if there's a problem with my math, but it seems to indicate that #3 will substantially increase my tax burden more than #1 or #2.

If I use 1116 to claim the FTC, I'd have to pay a marginal rate of 33.3% on $11,485 of additional, foreign income = $3,825. I've only paid the CRA CAD$ 2,520 / 1.326 = $1,900 in fed+prov taxes, which means I'll have an additional $1,925 in taxes to pay to the IRS to account for my foreign income. That's more than 33.3% of the foreign income that surpasses my FEIE max threshold (~$3k), or 33.3% of the difference in my standard deduction and what I can itemize ($2.2k).

I've also learned that California does not honor the FEIE/FTC, i.e. I would have to add back the amount exempted via the FEIE onto my California AGI, which seems relatively punishing; I'd be looking at paying my marginal CA rate of 9.3% on all $11,485 that I earned in foreign income. How can I avoid this other than by filing a dual-status return, thus simply not including my foreign income to begin with?

Thanks!

nelsona
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Joined: Wed Oct 27, 2004 2:33 pm
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Re: Avoiding double tax on Cdn income as emigrant to US

Post by nelsona » Wed Mar 25, 2020 9:40 am

1 and 2 do not allow you to take the standard deduction, which would more than cover your Cdn income. You should of course prepare actual returns each way and confirm for yourself.

We have covered these options 100's of times here, happy browsing.
Nelsona Non grata. Non pro. Search previous posts. Happy Browsing :D

nelsona
Posts: 16184
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Re: Avoiding double tax on Cdn income as emigrant to US

Post by nelsona » Wed Mar 25, 2020 9:42 am

Sorry, #1 does not allow standard deduction. #2 typically doesn't work unless you can exclude enough income to not be taxable at all (ie. live in foreign country earning only foreign income.). The resisnce period is calucated based on the PEVIOUS months you were in Canada, BEFORE moving.
Nelsona Non grata. Non pro. Search previous posts. Happy Browsing :D

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