Hello,
Can someone confirm if it is possible to owe no tax for my situation below? It sounds too good to be true.
[[I am also showing I would be eligible for making work pay tax credit for wife and I (another $800 on top of getting all US tax back) and TurboTax is agreeing.]]
--Situation--
Wife and I moved Can to US in October 2009. Wife is non-working spouse in US, but had Canadian income.
We are filing 1040 MFJ, with 2555 to exclude our Canadian income, 1116 to exclude Canadian interest, and 8833 for good measure citing XXV(1); plus 8891 for RRSPs.
On the 2555, our combined Canadian income was below the pro-rated limit (300ish days * 91,400) so we are able to exclude 100%.
My US Income (and thus AGI on line 38) from October 2009 to December 31 2009 was less than Deductions for MFJ, bringing Taxable Income to 0. I could also claim deductions for local taxes of our Car we bought in November, to change Deductions if needbe.
Did I make a mistake anywhere? Like i said above, it also sounds like we are eligible for another $800 from Making Work Pay on top of this - which doesn't sound right.
Thank you so much in advance!
No US Tax Owed plus Making Work Pay, Did I Make A Mistake?
Moderator: Mark T Serbinski CA CPA
Yup, entered in all amounts into TT and it shows same.
I just find it odd that I am getting 100% of the tax back that I paid in US for 2009 plus working tax credit. (basically a welcome to US, here's $800 gift).
When I did up with 1040NR by hand (without treaty) I showed my tax owed was something like ~$400 and I would be getting a refund for all the taxes I paid.
Basically it just feels wrong or something, like I am abusing the treaty. From everything I've read everyone else does it right, so unless you can think of some kind of mistake (AGI < $11,400, $0 taxable income = $0 tax).
I just find it odd that I am getting 100% of the tax back that I paid in US for 2009 plus working tax credit. (basically a welcome to US, here's $800 gift).
When I did up with 1040NR by hand (without treaty) I showed my tax owed was something like ~$400 and I would be getting a refund for all the taxes I paid.
Basically it just feels wrong or something, like I am abusing the treaty. From everything I've read everyone else does it right, so unless you can think of some kind of mistake (AGI < $11,400, $0 taxable income = $0 tax).
Usually 2555 spreads all the deductions over the US and foreign income, but, if you made less than about $14K, I guess it could make you owe no tax.
The $800 credit is exactly as you describe. If you had kids you'd even get $1000 more.
The $800 credit is exactly as you describe. If you had kids you'd even get $1000 more.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing 
Thank you so much so for for your assistance!
From your second last reply, this may have been where I messed up. :? My US and Canadian combined income was more than $14K, but with 100% Canadian income excluded my US came under $14k.
Basically what my return is showing is (US Income + Interest + Canadian Income) - Canadian Income = US income + Interest (as AGI before going into deductions and exemptions).
(If you don't mind..) Well I'm no longer confident, the examples in pub 54 hint that I can just take my gross Canadian income (box 14 on T1) [in USD] and use that as Foreign Wages in 1040 and both Foreign Earned Income on 2555.
I am now doubting myself, but was I supposed to take off any Canadian deductions or exemptions, RRSPs contributions, etc. for either value?
From your second last reply, this may have been where I messed up. :? My US and Canadian combined income was more than $14K, but with 100% Canadian income excluded my US came under $14k.
Basically what my return is showing is (US Income + Interest + Canadian Income) - Canadian Income = US income + Interest (as AGI before going into deductions and exemptions).
(If you don't mind..) Well I'm no longer confident, the examples in pub 54 hint that I can just take my gross Canadian income (box 14 on T1) [in USD] and use that as Foreign Wages in 1040 and both Foreign Earned Income on 2555.
I am now doubting myself, but was I supposed to take off any Canadian deductions or exemptions, RRSPs contributions, etc. for either value?
You don't reduce ANYTHING from the wages you report on wage line or 2555, except group employer funded RRSP.
Putting aside the $800 creit, If you owe tax before using 2555, you will owe tax after using 2555, the way it works now.
Putting aside the $800 creit, If you owe tax before using 2555, you will owe tax after using 2555, the way it works now.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
Thanks again sir!
I presume when you say "if you owe tax before", that is just referring to any tax I would owe on my US income and interest (without consideration of Canadian wage income)? If so, then yes I overpaid tax on US income as it was less than $14k for those 2 months.
Otherwise I am failing to understand how I would _not_ owe tax when I include Canadian income without showing any taxes paid on that.
I thought it made sense I could subtract all my RRSP deductions I made into employer-setup RRSP, as pre-tax money was coming off of paychecks. I already know from the KPMG article you referenced in another thread that I don't have to worry about reporting my DCPP1 at all (except on FBAR). Thank you for confirming :-)
I presume when you say "if you owe tax before", that is just referring to any tax I would owe on my US income and interest (without consideration of Canadian wage income)? If so, then yes I overpaid tax on US income as it was less than $14k for those 2 months.
Otherwise I am failing to understand how I would _not_ owe tax when I include Canadian income without showing any taxes paid on that.
I thought it made sense I could subtract all my RRSP deductions I made into employer-setup RRSP, as pre-tax money was coming off of paychecks. I already know from the KPMG article you referenced in another thread that I don't have to worry about reporting my DCPP1 at all (except on FBAR). Thank you for confirming :-)
This is how 2555 is supposed to work:
You report ALL world income, say $100K. You exclude, say, 85K as Cdn wages.
So, if, without 255 you would have IRS tax, then after 2555, you should owe 15% of that original amount.
So, what I 'm saying, is unless there is some quirk, you should owe tax to IRS (I don't care about withholding, that doesn't affect the calculation).
You report ALL world income, say $100K. You exclude, say, 85K as Cdn wages.
So, if, without 255 you would have IRS tax, then after 2555, you should owe 15% of that original amount.
So, what I 'm saying, is unless there is some quirk, you should owe tax to IRS (I don't care about withholding, that doesn't affect the calculation).
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
"So, if, without 255 you would have IRS tax, then after 2555, you should owe 15% of that original amount."
Adding to what nelsona said, the amount you "owe" may in fact be less than 15% of the original amount. If some of your non-earned income (e.g. from investments) is non-US, you can then use any available tax credits to further reduce the amount you owe. This could certainly reduce your ultimate liability to $0. Just wanted to add that clarification. :-)
Adding to what nelsona said, the amount you "owe" may in fact be less than 15% of the original amount. If some of your non-earned income (e.g. from investments) is non-US, you can then use any available tax credits to further reduce the amount you owe. This could certainly reduce your ultimate liability to $0. Just wanted to add that clarification. :-)
Hi nelsona or cfn2007,
I now understand what you are saying*. I calculated the taxes owed on all world income, determined the % taxes proportionate to Canadian income (83%), subtracted it from total taxes to determine the IRS tax owed on the 17%. I would then factor in my FTC on non-us interest. My question is, how do I show this?
*When I read 1040 instructions it says I need to fill in the Foreign Earned Income Tax Worksheet to determine Line 44.... this is not ending up to be the same number as above.
I fill in Line 1 of worksheet without 2555 exclusion, right? So let's say that's $65k from AGI Line 43 (which already has deductions and exemptions applied to ALL world income). It then says to add in foreign income being excluded ($70k) making it $130k. I then calculate taxes on $130k, subtract taxes from $70k exclusion, and am left with a number that is 5x what I calculated using math from above.
If I fill in Line 1 with exclusion already, my AGI Line 43 is $0 making questions 4 + 5 cancel out leaving an amount of $0. This is what TurboTax appears to be doing.
What am I missing? I do appreciate your help :-)
PS: For anyone else who stumbles across this thread, this is documented in Pub 54 on Page 20 under "Figuring tax on income not excluded" or on 2555 instructions, page 2 under same title.
I now understand what you are saying*. I calculated the taxes owed on all world income, determined the % taxes proportionate to Canadian income (83%), subtracted it from total taxes to determine the IRS tax owed on the 17%. I would then factor in my FTC on non-us interest. My question is, how do I show this?
*When I read 1040 instructions it says I need to fill in the Foreign Earned Income Tax Worksheet to determine Line 44.... this is not ending up to be the same number as above.
I fill in Line 1 of worksheet without 2555 exclusion, right? So let's say that's $65k from AGI Line 43 (which already has deductions and exemptions applied to ALL world income). It then says to add in foreign income being excluded ($70k) making it $130k. I then calculate taxes on $130k, subtract taxes from $70k exclusion, and am left with a number that is 5x what I calculated using math from above.
If I fill in Line 1 with exclusion already, my AGI Line 43 is $0 making questions 4 + 5 cancel out leaving an amount of $0. This is what TurboTax appears to be doing.
What am I missing? I do appreciate your help :-)
PS: For anyone else who stumbles across this thread, this is documented in Pub 54 on Page 20 under "Figuring tax on income not excluded" or on 2555 instructions, page 2 under same title.
Hi nelsona,
The Foreign Earned Income Worksheet appears to have changed since the one in 2006, which used to work properly. I pasted it below for convenience sake.
Basically anytime the foreign earned income is greater than taxable income you end up with $0 taxes, due to #6.
If you are supposed to do FEI worksheet before you calculate a new Line 43, then you have to add foreign income twice and thus end up in 25% bracket. If you use Line 43 after FEI exclusion, then taxable income already has had deductions + exemptions which means if US income was less than ~$14K you owe 0 taxes.
I trust what you said above, so am I misinterpreting the worksheet?
---------------------------------------------
(from 2009 1040 instructions, page 38)
1. Enter the amount from Form 1040, line 43
2. Enter the amount from your (and your spouse’s, if filing jointly) Form 2555, lines 45 and 50, or
Form 2555-EZ, line 18
3. Add lines 1 and 2
4. Tax on the amount on line 3. Use the Tax Table, Tax Computation Worksheet, Qualified
Dividends and Capital Gain Tax Worksheet*, Schedule D Tax Worksheet*, or Form 8615,
whichever applies. See the instructions for line 44 that begin on page 37 to see which tax
computation method applies. (Do not use a second Foreign Earned Income Tax Worksheet to
figure the tax on this line)
5. Tax on the amount on line 2. Use the Tax Table or Tax Computation Worksheet, whichever
applies
6. Subtract line 5 from line 4. Enter the result. If zero or less, enter -0-. Also include this amount on
Form 1040, line 44
---------------------------
Before I posted this I did more research and the folks over on vj came to same conclusion. http://www.visajourney.com/forums/topic ... ed-income/. They state 1116 is now better for Canadians as you will be bumped up to 25% bracket due to new calculations.
The Foreign Earned Income Worksheet appears to have changed since the one in 2006, which used to work properly. I pasted it below for convenience sake.
Basically anytime the foreign earned income is greater than taxable income you end up with $0 taxes, due to #6.
If you are supposed to do FEI worksheet before you calculate a new Line 43, then you have to add foreign income twice and thus end up in 25% bracket. If you use Line 43 after FEI exclusion, then taxable income already has had deductions + exemptions which means if US income was less than ~$14K you owe 0 taxes.
I trust what you said above, so am I misinterpreting the worksheet?
---------------------------------------------
(from 2009 1040 instructions, page 38)
1. Enter the amount from Form 1040, line 43
2. Enter the amount from your (and your spouse’s, if filing jointly) Form 2555, lines 45 and 50, or
Form 2555-EZ, line 18
3. Add lines 1 and 2
4. Tax on the amount on line 3. Use the Tax Table, Tax Computation Worksheet, Qualified
Dividends and Capital Gain Tax Worksheet*, Schedule D Tax Worksheet*, or Form 8615,
whichever applies. See the instructions for line 44 that begin on page 37 to see which tax
computation method applies. (Do not use a second Foreign Earned Income Tax Worksheet to
figure the tax on this line)
5. Tax on the amount on line 2. Use the Tax Table or Tax Computation Worksheet, whichever
applies
6. Subtract line 5 from line 4. Enter the result. If zero or less, enter -0-. Also include this amount on
Form 1040, line 44
---------------------------
Before I posted this I did more research and the folks over on vj came to same conclusion. http://www.visajourney.com/forums/topic ... ed-income/. They state 1116 is now better for Canadians as you will be bumped up to 25% bracket due to new calculations.