Paying taxes in Canada and US

[campath]

Rounding the numbers to make the math easier:

US income (Jan-June):
Me: $60000 USD
SO: $60000 USD
Deductible expenses: work $9000, childcare $7000

Canada income (Jul-Dec):
Me: none
SO: $75000 CAD
Deductible expenses: work $17000, childcare $7000, medical $3500

From what I understand, we have to file a tax return in the US on the combined income irrespective of where it was earned and claim a deduction for taxes filed in Canada and pay the difference.

Questions:
-do I declare my Canadian income on the US return and vice versa or keep them separate?
-do I file taxes jointly in the US or married filing separately because I have to file them separately in Canada anyways and it will make each persons tax deduction more clear?
-is there any advantage to filing in US or Canada first and then claiming the tax paid as a deduction on the second countries tax?
-can I combine all expenses from both countries and claim them as a valid deduction on both tax returns (eg. work expense in Canada as a deductible expense in US tax return)?

[CanuckExpat]

Sorry I can't be of more help, I'm mostly posting to follow and learn from others.

My unfortunate gut reaction is that dual country taxes might necessitate one or more professionals tax prepares with expertise in optimzing each and both together, but I'd love to be proved wrong :)

[Novik]

When dealing with cross-border taxation issues, there are three easy steps.

• Lie down on the floor and cry
• Realize that no one cares more about getting your taxes right then you do, the internet is full of crucial info but also misinformation, and even so-called experts may be wrong about complex situations
• ????

I'm still on 3 for my own cross-border woes (aka how the **** do I invest as a Canadian resident but dual citizen) but I'll throw some ideas your way.

The US and Canada have a tax treaty that means that Canadian earned/wage income can be excluded with a direct deduction up to ~80k USD. I would guess something similar applies the other way. So declare all income on both, but you should probably have equivalent deductions on all foreign income. You may not have to file Canadian taxes if you resided in Canada less than the US and earned no income but may need to for credit reasons. (honestly who knows but I'd play it safe and file in both places)

You file basically at the same time for both... you might be able to claim tax paid/payable but it doesn't depend on filing some first (and as above dual income taxation is avoided through the tax treaty). I'm guessing you may only be able to claim the deduction from a country on that's country return against income in that country. That seems sensible.

As for MFS vs. MFJ.... not sure but I would go with whatever you did previously in the states for you and the IRS's sanity, unless a tax professional tells you otherwise.

Speaking of which.... get a tax professional who specializes in cross border tax issues unless you have no other option. It will cost money and suck but if you do it for 2016 you avoid issues that could haunt you later. Also, if you or your wife are US citizens, you are in for a whole world of hurt (PFIC, FBAR, filing taxes with the IRS forever etc). I hope not for your sake but speak up if otherwise!

Good luck and please update us as it goes :)

[CatInTheHat]

Novik is right, best solution is to just cry.

I am a US citizen and recently lived in Calgary, AB for about 3 years, and am back now.  The good news is that there is a tax treaty in place so you don't have to worry about being double taxed for the most part.    The bad news is that it is incredibly complicated.  I believe you will base you income on where you lived more than 1/2 of the year, and then seek a credit for the other earned income.  My taxes were nearly always a wash either direction.

Either way you need a CPA.  I have a good guy (Alan Tung at BBA accounting in Vancouver) that did my US and Canada returns the last few years that I was happy with.  The cost to PREPARE both of the returns was $1400 CAD 2014 and $1100 CAD 2015.

[Bryan_in_Ger]

Hi Campath,

My two cents:
1) File all income where you lived longer, claim national deductions, and claim an exemption for the foreign income.
2) File all income in the country you lived in for a shorter period, national deductions, and claim tax credit for taxes paid in the first country.


I don't know if it would be more useful to claim all deductions in the US or Canada, but I would avoid claiming any deductions twice; that smells like tax-fraud to me.  It should end up being a wash more or less, but I've never had earned income in more than one country in one tax-year so take that with a grain of salt.

Also, I'm single, so I can't help you on that front.


I second CatInTheHat and Novik: consult a tax professional.  I assume this year is more complicated than normal since you moved, but I also assume you won't be switching back and forth too often so it might be worth it to "invest" in professional advice.


Good Luck!

Cheers,
Bryan

[campath]

Thanks for the replies.

I spoke to a tax professional.

1. Basically he advised me to file as a dual status resident i.e resident status for the first half of the year and non-resident status for the second half.

2. Also I only declare income earned in the US on my US tax return but both incomes on the Canadian tax return and claim a rebate for tax paid in the US.

3. All deductions to be claimed only once and in the country to which it pertains.

4. Have to file as married filing separately.

Tip: while discussing my 401k, he advised a rollover to an RRSP once I have built up enough contribution room and have a large enough tax burden to claim back the penalty I pay for early withdrawal. I can then use the money in Canada if buying a home for the first time.

[Novik]

Tip: while discussing my 401k, he advised a rollover to an RRSP once I have built up enough contribution room and have a large enough tax burden to claim back the penalty I pay for early withdrawal. I can then use the money in Canada if buying a home for the first time.

That's a tip designed for people who have trouble saving up the money for a down payment - you borrow the money from your RRSP and have to pay it back, meanwhile it's out of the market. Doesn't seem worth paying the penalty on your 401k, even if taxes could cancel it out.

More importantly, you lose the tax advantaged space in your 401k forever, and don't get to use your RRSP space for new earnings in Canada. Better plan would be to fill your RRSP every year in Canada (which is easier than in the US until you earn 100k, since it's 18% not 18k).