RRSP Tax Calculation For CA

[ikeaidea]

Dear Nelsona,

I am doing the amendment tax returns for RRSP for previous years now, and I have some questions about the forms. Hope you could help me out.

1) For 1040X, when I back file 8891, I don't need fill out any dollar amount in "Income and deduction, Tax liability, Payments", but only need to fill out line B, C. (See insturction of 1040X instruction page 5 -- You are providing only additional information http://www.irs.gov/pub/irs-pdf/i1040x.pdf) . And then attached Schedule B (for the question about Foreign Bank Account) and 8891 form. Correct?

2) For California 540X, I need do the schedule CA to include the earnings (or loss) of RRSP for the year amended, right?

3) In the distribution year, include all withdrawal as income for 1040, but how about 540? All tax free? I saw the FTB said the contribution is regarded as investment and distribution is return the capital. So if all contribution is made before I move to CA and I paid all tax for earned income for previous years, all distribution (contribution + previous earning) is free except the current year earning? Please clearify.

4) Last question is for the back filing years. The IRS announce the new VDP and it covers from 2003 for TD-F forms. Does it mean I need back file 8891 from 2003 also, or 6 years is sufficent? The difficulty for me is no documentation is available for 2003, for TD-F, I could estimate, but for 8891, I really have no idea how to make estimatation. Please advice.

Thank you so much!

Ikeaidea

[nelsona]

1, 2 correct.
3. For 1040, You include all the distribution as gross income. However the taxable portion is based on the growth since arrival in US (I;ve explined this many times on other posts). For 540, only income triggered by the fianl sale is reported, since all previous growth has been included. So, any cap gains/losses from selling the last assets to collapse the account would be reportable in Cali.
4. 8891 need only be back-filed for 6 years. However, for tax purposes, you must still come up with the value of your RRSP when you moved to US.

[ikeaidea]

Nelsona, thanks for the reply. I searched your posts but still wondering which line to report the Gross Distribution and taxable portion?

For example, I have $400 gross distribution-- $100 is book value when I arrive California as Non US citizen, $150 is capital gain, ($50) is capital loss, $200 is interest income.

Q1-- For previous years, I need report $150 Capital Gain, ($50) capital loss, and $200 interest income on Schedule CA. Right?

Q2--Assuming there is no any income in distribution year. For 1040, When I withdrawal, Need I put all net growth $300 in Other Income, or break down $200 to Schedule B, $150 and ($50) to Schedule D of 1040? Or total Gross $400 Gross as Other Income, then $100 book value as deduction?

Q3 -- For California withdrawal year, $300 deduction in schedule CA?


Thanks!

[nelsona]

Q1. For cali, You need to report whatever gains/losses you incurred, in the year they were incurred. it should add up to net $300. For Fed, you use 8891 and elect deferral and report nothing.

Q2. When you withdraw, assuming there is no capital gain form the sale, you need report nothing to Cali. For Fed, you will include $400 on your 8891, $300 taxable, and transfer these to line 16a and 16b of 1040. It does not go on Schedlue B or D. Its clear on the 8891.

Q3. If the $300 deduction is to exclude your $300 pension income from line 16b of 1040, then that is correct. You have already reported the income in previous years.

[ikeaidea]

Thanks Nelsona, very clear and helpful answer.

As for the foreign tax credit, may I put all I paid to canada as credit or just the portion related to the growth as credit? For example, for gross distribution $400 ($100 book value), I paid $100 for Canada. But may I use $100 foreign tax paid as credit for the $300 taxable income? Or just $75 as credit?


For the tax-free (book value) portion, is it from tax treaty? I looked through publication 939 but nothing talking about RRSP. Could you provide me a direct resource for this tax-free benefit?

And my last question is about Canada Tax return. Bad thing is I didn't tell bank that I was a non-resident when I did the withdrawal. Does it mean I need file the Canada Tax return as nonresident to fix this problem for the flat 25% rate?

Thanks!

[nelsona]

You include all the tax when calculating form 1116. You will get very little of it credited. You can instead use it as a deduction, if that is better, but only the ammount you paid in 2010, which apparently was not correctly withheld. For the tax credit you just use the 25% as accrued tax.

The determination of tax-free portion is not a treaty issue, it is described in old Rev Proc 89-45, which although obsolete, still shows how the "contribution" potrtion of your RRSP is determined, by section 72 of the IRC: book value on date you became US taxpayer.

To fix the problem in canada, you need to send CRA a letter -- NOT a tax return. You need to show them how much was withheld (you were or will be issued a T4 by the bank) and you need to send them the difference, so that you end up paying 25%.

[ikeaidea]

Thanks again for the helpful answer.

As for the letter, is there any format I could follow? Or just write and explain is enough?

Thanks!

[nelsona]

wrie and explain. You need to quote your SIN number and include your T4RSP.

[ikeaidea]

One more question about foreign tax credit for the RRSP withdrawal.

I don't have much growth in RRSP. What I understand from your previous post is Itemize deduction sometimes will be better than 1116 credit. If I use deduction, assume $400 gross distribution, $100 canada tax paid. If my marginal US tax rate is 30%, the $100 canada tax paid means I will have $30 back from US refund if I have no growth? But if I have some growth, assume is $10, what I get US tax refund is $30 - $10*30%=$27, right?

If I reach AMT tax, what adjustment need I do?

Last question is when I do the amendment for 8891, should I mail all amendments for previous years in one envolop or send it seperate for each year? Or doesn't matter?

Thanks!

[nelsona]

Your analysis is correct. If you don't foresee any future use for the Cdn tax (like if you work in canada for a few weeks), tehn use the deduction.

If you hit AMT, then your deduction will not be reduced. Simply factor that in to your decision.

[richarooca]

I've been using US TurboTax with CA state for several years, and this is the first year I recall seeing the request to enter Canadian RRSP info. I am CA Non-Resident but file a CA return because of a rental (my former primary residence in CA).

Is this requirement to provide the RRSP int/dividend/capital gains ONLY on years in which you are taking income from the RRSP?

I assume as non-resident, even if I provided figures that the net tax would be 0, but I just don't remember seeing the request for info before.

[nelsona]

Turbo tax prepares the 8891 forms, so they need RRSP info, regardless of whether you are declaring income or not.

[richarooca]

Thanks Nelson. Always appreciate your help here and this whole forum.

I had completed the US portion already, and on 8891 I have clicked the 6a box Yes so never filled out the distributions portion before.

It was after I had entered my US and selected to add CA state that the CA interview asked me for the additional info about the RRSP.

Specifically, it said "The total Canadian RRSP interest and dividends earned during 2010 are taxable in California". I just threw in values of 10K to see if it would make a difference on what I owed and it did (albeit very small), but I was expecting 0 because of non-residency.

So I will go dig up the real values.

And if this isn't the first year that CA has done this, do I need to provided RRSP figures for previous years?

[nelsona]

Your 8891 form applies only to Fed.

If you need to include income from within the plan for Cali purposes, this doesn't change the 8891. You simply figure out the income and report it on your Cali return.

But if you are not resident of cali, you should NOT be reporting any RRSP income, since it is not Cali-sourced. They are only reportable in years you were resident or part-resident.

[nelsona]

You may be liable for past Cali tax if you have not been reporting RRSP on their return