RRSP distribution and 1040 filing for 2014 tax year in US

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namcho5
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Joined: Sun Feb 08, 2015 7:18 pm
Location: Iowa

RRSP distribution and 1040 filing for 2014 tax year in US

Post by namcho5 »

Hello,

We moved to US in 2009 and have kept filing 8891 since. We cancelled our RRSP account in 2014. The final balance was about $20k and $700 was increased from 2009. The 25% non-resident withholding tax of $5k was taken and an NR4 was received recently.

Please help me understand how to report it this year. I read so many on this forum but it makes me so confused. I see two approaches but do not know what to do:

A) Report the total distribution $20k and claim $5k for foreign tax credit in Form 1116.

B) Just report the net gain $700 (assuming "cost basis" of RRSP investment) from 2009 to 2014. Not sure about foreign tax credit. I don't think I can claim $5k.

My questions are:

1) If I use the approach A), which income category in Form 1116 should I choose from (Passive, General, Section 901(j), Certain income re-sourced by treaty, Lump-sum distributions)? The Passive income is for interest or dividend etc. I don't know what's for the Lump-sum distribution. We withdrew it all, so is it lump-sump distribution? When the Lump-sum distribution category is set I get a huge tax due on TurboTax. The Passive and General categories give about similar refund but not the same and I get only $3k credit as this RRSP distribution is relatively small to other US income.

2) Do I need to fill in 16a (Pensions and annuities) and 16b (taxable amount) in Form 1040?

3) What is the taxable distribution amount? Is it $20k or $700?

Thank you very much for your help,
Nam
PS:
There was an announcement from IRS in late 2014, but I cannot understand some terms like "the entire amount of each distribution is subject to US income tax". It sounds like I need to report the total distribution as taxable amount.


Internal Revenue Bulletin: 2014-44
October 27, 2014
Rev. Proc. 2014–55

SECTION 6. DISTRIBUTIONS FROM CANADIAN RETIREMENT PLANS

Distributions received by any beneficiary or annuitant from a Canadian retirement plan, including the portion thereof that constitutes income that has accrued in the plan and has not previously been taxed in the United States, must be included in gross income by the beneficiary or annuitant in the manner provided under section 72, subject to any applicable provision of the Convention.

SECTION 7. EXAMPLE

Example: Taxpayer is a U.S. citizen and a resident of Canada who established an RRSP in 2004 and filed Form 1040, U.S. Individual Income Tax Return, for 2004 and all subsequent taxable years. Taxpayer did not attach to any Form 1040 a Form 8891 with respect to the RRSP and did not make an election under the procedures set forth in Revenue Procedure 2002–23. Taxpayer also did not include as gross income on any Form 1040 any earnings that accrued in the RRSP during 2004 and subsequent taxable years. Taxpayer has not received any distributions from the RRSP. Pursuant to section 4.01 of this revenue procedure, Taxpayer is an eligible individual and, pursuant to section 4.02 of this revenue procedure, will be treated as having made an election under Article XVIII(7) of the Convention to defer current U.S. income taxation on the undistributed income for 2004 and all subsequent taxable years through the taxable year in which there is a final distribution from the RRSP. [url]When Taxpayer receives distributions from the RRSP, the entire amount of each distribution will be subject to U.S. Federal income tax. In addition, Taxpayer is not required to report his interest in the RRSP on Form 8891, Form 3520, or Form 3520–A.[/url] However, Taxpayer may need to report his interest in the RRSP under section 6038D or under another provision of U.S. law, including the requirement to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), imposed by 31 U.S.C. § 5314 and the regulations thereunder.
nelsona
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Post by nelsona »

The Rev Proc has some confusing wording but this is the correct way:

1. Report gross RRSP on 16a ($20,000)
2. Report taxable portion on 16b ($700)
3a. Use the $700 net income and the $5000 tax on form 1116 general limit income
You will only get a credit of say $100 using this and have a carry forward of $4900 which you can use in futire years if you have other foreign income,

3b. Instated, if you have no other Cdn sourced of income, you could simply report the whole $5000 tax as a foreign tax deduction on schedule A. Thus will give you a much bigger return, but no carryforward.

Most try both ways and see which is better.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
namcho5
Posts: 8
Joined: Sun Feb 08, 2015 7:18 pm
Location: Iowa

Post by namcho5 »

Thank you very much Nelson. Your postings have been very helpful for me.

If I use Schedule A for deduction it would be Line 8 (Other taxes. List type and amount) I guess. How should I write the tax type? I would not have any major foreign income in this general income category, so I would try this way.

Do I need to attach any other forms to explain about the net gain $700? I am using TurboTax for e-filing so do not send any paper forms. I don't think I need to send 3520 per Rev. Proc. 2014-55. Maybe I just wait and see if IRS would request backup documents such as NR4 from CRA? IRS has my previous 8891 from 2009 to 2013, so the net income is known.

One last question as I am still not clear about the taxable amount and foreign tax credit. The total distribution $20k was taxed in Canada. Could you explain me why only the net gain $700 is taxable in US and I can still claim $5k foreign tax credit?

Thanks again,
Nam
nelsona
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Joined: Wed Oct 27, 2004 2:33 pm
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Post by nelsona »

Historically, only the RRSP gains after arrival in US are taxable in US. That has long been established. So I assume you are fine with that treatment.

Form 1116 is designed to limit the tax credit to the lower of the foreign tax you paid or the US tax you owe on this foreign income, that is why only ~$100 credit will be granted: the effective taxrate on $700 of income on your 1040.

The definition for eligible foreign tax (whether you use it for credit on 1116 or deduction on line 8 of Sched A) includes tax on all foreign income that is reported on 1040, and not subsequently excluded by the foreign earned income exclusion (FEIE- Form 2555), which doesn't apply to your pension income. You are reporting all the income, the net value has nothing to do with FEIE.
So in either case, you get to use the $5000. It's jus that 1116 limits you anyways, and large Sched A deductions run you into the AMT posibilities.

And just as a side note. Nothing you reported on past 8891's would have indicated what the book value of your RRSP was when you began reporting to the IRS. That would be a figure you would have determined back then and kept in your own records, for use when the time came (which for you was 2014). It is not the year-end value reported on 8891, and it is not the FMV on the day you arrived.

I've explained BOOK value of RRSP determination severel times elsewhere if you need a refresher. Happy browsing.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
namcho5
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Joined: Sun Feb 08, 2015 7:18 pm
Location: Iowa

Post by namcho5 »

Thanks Nelson. Now it's pretty clear to me.

But I just happened to know that we made contribution about $15k in Dec. 2009 after moving to US in Aug. 2009. It was a payment back to bank for what we withdrew from the RRSP account in early 2009. Is anything different in this case?
namcho5
Posts: 8
Joined: Sun Feb 08, 2015 7:18 pm
Location: Iowa

Post by namcho5 »

We filed 1040 as full-year US residents.
nelsona
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Post by nelsona »

No
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
namcho5
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Joined: Sun Feb 08, 2015 7:18 pm
Location: Iowa

Post by namcho5 »

Two more questions:

A) Do I need to check Yes in Line 8 of Schedule B Part III (Foreign Accounts and Trusts)? The question is "During 2014, did you receive a distribution from, or were you the grantor of, or transferor to, a foreign trust? If "Yes," you may have to file Form 3520. I think it is yes but we no longer need to file 3520 from 2014 return. Correct?

B) I get about $1k more federal tax refund when I do not use 1116 Foreign Tax Credit (I get only $100 credit) but use $5k deduction in Schedule A Line 8 (Other taxes). And TurboTax tells me I do not need AMT, so it is good. But I am not clear how I get more refund than RRSP gain $700.

Thanks,
Nam
nelsona
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Post by nelsona »

Yes you do need to tick all those boxes on sched B. You only ned 3520 for RESP or TFSA.
Your refund is because you over[aid your taxes on other income of course.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
namcho5
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Joined: Sun Feb 08, 2015 7:18 pm
Location: Iowa

Post by namcho5 »

Yesterday I heard from a TurboTax (Intuit) Tax Advisor that it may not be right to use deduction in Schedule A (instead of foreign tax credit, F1116) for the $5k withholding tax I paid to Canada. IRS says we can choose either income deduction or foreign tax credit but I don't think this applies to my case as my US income from RRSP distribution is only $700.
nelsona
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Post by nelsona »

Turbo tax advisors are not cross-border experts at all. Consult them only if your software isn't working.

You have the choice, 100%

Not that it matters, but di he give you a reason. I can counteract whatever reason he gave you as soon as I will stop laughing.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
namcho5
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Location: Iowa

Post by namcho5 »

Nelson, what is your reason then? Are you refering this?

Foreign Tax Credit - Choosing To Take Credit or Deduction
http://www.irs.gov/Individuals/Internat ... -Deduction

But it says also; "The foreign tax credit is intended to relieve you of the double tax burden when your foreign source income is taxed by both the United States and the foreign country."

The net RRSP income I report to US is only $700 and the tax is like $200, and foreign tax credit gives back $100 and the rest $4.9k carries over. If I use deduction then I have more than $1k extra refund from US. Double taxation is only $200, but the deduction results in far less tax to US. Does it make sense? I think I can only deduct it when the taxable income is the total distribution $20k not the net growth $700.
nelsona
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Post by nelsona »

You did not give me the reason your turbo tax "expert" gave. Amuse me first.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
namcho5
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Joined: Sun Feb 08, 2015 7:18 pm
Location: Iowa

Post by namcho5 »

It is about the same reason I thought, so maybe not correct anyway.
nelsona
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Post by nelsona »

So. It gores to the definitions of "eligible foreign tax" and "not eligible foreign tax".

Essentially, as is clearly pointed out in FOrm 1116 instructions, pretty much any foreign income tax is eligible tax.
They list 10 taxes that are not eligible, none of these apply to you. Further in the instuctions, they als indicate that tax against income that has beem excluded, by form 2555, is not eligible. Doesn't apply. In case you get the idea that just because something is not taxable in US that it is "excluded" than is not the case for gross/net taxable pension income. You are reporting all the pension income, it simply isn;t all taxable.

So, 100% of the tax related to your RRSP withdrawl is eligible for the credit, or for the deduction. Period.

Now, to the statement that "The foreign tax credit is intended to relieve you of the double tax burden when your foreign source income is taxed by both the United States and the foreign country."

Exactly. This is referring to the foreign tax CREDIT. Form 1116 limits the CREDIT to, among other things, the US tax that you paid on the Income in question. It did that. That is why you are getting very little CREDIT, because the US tax on the $700 is very small.

No such limit exists on the decution. So, the whole amount is included (as it is also included on 1116 if you choose credit over deduction).

It is precisely because CREDIT is so limited that IRS gavce the option of using it as a deduction.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
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