# General expat tax question



## SarahCanUS (9 mo ago)

Hi,
I was hoping someone might be able to answer a question about my situation so I can decide whether to hire a professional or not. Money is tight for me these days unfortunately.
I’m a US citizen/Canadian PR that has been living in Canada for 10 years. I work and live in Canada and my only ties left to the US are my family and a meager savings account I haven’t closed yet but has <$1000USD. I am employed by a Canadian employer, my family (spouse and child) lives here with me and are all Canadian citizens (not US citizens or residents or anything). My life is here.
My mom is an accountant and has been keeping my US taxes current since moving abroad, and i have filed my FBAR yearly as well once I met criteria. This year I decided it was time to learn to do them myself. I don’t own my own business, have rental properties, investments beyond my foreign pension and RRSP, so I felt they would be fairly straight forward. 
The only year that was not straight forward was the 2020 year. My grandparents passed away and I was left with a small inheritance in the form of a Roth IRA which I chose to cash out because I did not want the headache of dealing with a US retirement account when I don’t anticipate ever living there again before I die. Federal taxes were withheld and paid on it, it was all reported, etc. The issue I have run into now is that I also discovered that my mom was using TurboTax for my taxes all along because she was too prideful to admit to me that she didn’t understand expat taxes fully. She has been using form 2555 for me all these years (which is correct, I’ve never made more than the exclusionary limit). I’m unable to understand though if there was a chance that I could have used form 1116 instead of 2555 and basically cancelled out the IRA taxes between carry overs considering my tax rate in Canada is quite a bit more than in the US. Can anyone tell me if that’s even possible, or if the IRA taxes would be exempt since they’re not wages necessarily? I am hesitant to hire a professional because 1) spending thousands of dollars to have someone review my mom’s work isn’t in my budget if it isn’t going to net me back some of that money spent on those taxes, 2) I am low key terrified my mom has actually been making massive errors that are beyond my comprehension and by pursuing this, I’m opening myself up for audits and penalties and fees which I also can’t afford. If it isn’t possible, I would rather let it be and let sleeping dogs lie I guess? Thanks for any insight. I unfortunately am finding the tax rules extremely confusing and I am not terribly financially literate. I also feel like since I did get a letter from the IRS for my 2020 taxes saying I owed like $120 because of the covid stimulus money, that the rest of the taxes should be correct.


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## Harry Moles (11 mo ago)

I can't really help with the details of your question since I don't understand the rules around the Roth IRA etc.

Just so you know, assuming you meet the criteria for transmission (having lived 5 years in the US, 2 of those years above age 14) then your child *is* a US citizen. If you didn't register their birth with a US consulate then the US government doesn't know of their existence, but technically they have dual citizenship. This has two important consequences: (1) if you travel as a family to the US, it's possible that someone at the border will notice and ask questions and advise you (politely or otherwise) to document your child's US citizenship and obtain a US passport for them; (2) if you were willing to put them on the US government radar by obtaining a Social Security Number, you stand to make a fair bit of money through both the stimulus benefit and the ongoing child tax credit. For some it's not worth trading their child's anonymity vis-a-vis Uncle Sam, but for others it's a significant chunk of cash. If you were to put that money into an RESP (done in the name of the non-US parent only, of course) then the Canadian government would add another 20 percent, which is not a bad deal.


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## SarahCanUS (9 mo ago)

Harry Moles said:


> I can't really help with the details of your question since I don't understand the rules around the Roth IRA etc.
> 
> Just so you know, assuming you meet the criteria for transmission (having lived 5 years in the US, 2 of those years above age 14) then your child *is* a US citizen. If you didn't register their birth with a US consulate then the US government doesn't know of their existence, but technically they have dual citizenship. This has two important consequences: (1) if you travel as a family to the US, it's possible that someone at the border will notice and ask questions and advise you (politely or otherwise) to document your child's US citizenship and obtain a US passport for them; (2) if you were willing to put them on the US government radar by obtaining a Social Security Number, you stand to make a fair bit of money through both the stimulus benefit and the ongoing child tax credit. For some it's not worth trading their child's anonymity vis-a-vis Uncle Sam, but for others it's a significant chunk of cash. If you were to put that money into an RESP (done in the name of the non-US parent only, of course) then the Canadian government would add another 20 percent, which is not a bad deal.


Thank you for bringing this to my attention. From my understanding, it isn’t that my child automatically gains citizenship, but rather that they are entitled to claim it. This was explained to me by an immigration lawyer, but was also 10 years ago when I immigrated so I understand the laws change. Nonetheless it sounds like I might need to reach out to an immigration lawyer on this because I don’t want my child to have a U.S. citizenship.


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## Bevdeforges (Nov 16, 2007)

On the 2555 vs 1116 issue, don't forget that you have to file a separate FTC form (1116) for each of three or four different types of income. And the tax credit (including the carry over) only applies to like forms of income - so salary income on salary income only, and investment or other "passive" forms of income on similar types of income. 

The 2555 applies only to "earned income" - that is to say salary and wages. But with no carry over of any limits you don't "use" in a given year.

And BTW, your child is considered a US citizen whether or not they ever "claim" it. You can't renounce citizenship for your child - he or she has to do it themself when they reach the age of majority and have the $2350 to buy themselves out of the system. However, if you just don't do anything and they were born outside the US, it's highly unlikely no one will ever come after them about it.


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## SarahCanUS (9 mo ago)

Bevdeforges said:


> On the 2555 vs 1116 issue, don't forget that you have to file a separate FTC form (1116) for each of three or four different types of income. And the tax credit (including the carry over) only applies to like forms of income - so salary income on salary income only, and investment or other "passive" forms of income on similar types of income.
> 
> The 2555 applies only to "earned income" - that is to say salary and wages. But with no carry over of any limits you don't "use" in a given year.
> 
> And BTW, your child is considered a US citizen whether or not they ever "claim" it. You can't renounce citizenship for your child - he or she has to do it themself when they reach the age of majority and have the $2350 to buy themselves out of the system. However, if you just don't do anything and they were born outside the US, it's highly unlikely no one will ever come after them about it.


So it sounds like an inheritance of a portion of an IRA that was cashed out indeed is separate from my taxes paid on income. Thank you so much for answering that for me, it helps me to make my decision!
Also as far as my offspring goes, thank you as well for pointing that out to me. It sounds like either the law changed since immigrating or the lawyer I spoke to was incorrect. While this has started a massive panic situation for myself, it won’t impact my current taxes so that’s a problem for a future date. Thanks again for your help!


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## Harry Moles (11 mo ago)

SarahCanUS said:


> Thank you for bringing this to my attention. From my understanding, it isn’t that my child automatically gains citizenship, but rather that they are entitled to claim it. This was explained to me by an immigration lawyer, but was also 10 years ago when I immigrated so I understand the laws change. Nonetheless it sounds like I might need to reach out to an immigration lawyer on this because I don’t want my child to have a U.S. citizenship.


It's often misunderstood, but your child is a US citizen from birth, by virtue of your meeting the criteria to transmit that citizenship; there is no such thing as being "entitled to claim" US citizenship - in a purely legal sense, you either have it or you don't, it's not a matter of choice. However, the US government will not know of your child's existence unless you register their birth at the consulate.

Where you are likely to run into problems is travel to the US. It's possible that an alert or inquisitive immigration officer might notice one parent with a US passport accompanied by a child with a Canadian passport. Worst case you are delayed while they explain that you need to register the birth and obtain a US passport (technically, all US citizens must enter the US with a US passport, though this law is not consistently enforced).

Since you mentioned that money is tight, having your child's Social Security Number could be quite profitable for you. I think the Child Tax Credit is now up to $1400 per year, plus of course you might still be able to claim additional stimulus benefit funds (not the full $3200 I believe, but close).

If you are worried about citizenship creating a lifetime of US tax obligations for your child, don't be. Any dual citizen born outside the US can easily conceal their US person status from financial institutions and will never need to deal with FATCA or file US tax returns. Having a US passport and Social Security Number as a child will not put them on the IRS radar as an adult.


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## SarahCanUS (9 mo ago)

Harry Moles said:


> It's often misunderstood, but the way to think of it is that while in a purely legal sense your child *is* a US citizen (by virtue of your meeting the criteria to transmit that citizenship) the US government will not know of their existence unless you register their birth at the consulate, so they might as well not be a citizen.
> 
> Where you are likely to run into problems is travel to the US. It's possible that an alert or inquisitive immigration officer might notice one parent with a US passport accompanied by a child with a Canadian passport. Worst case you are delayed while they explain that you need to register the birth and obtain a US passport (technically, all US citizens must enter the US with a US passport, though this law is not consistently enforced).
> 
> ...


Thank you. This is reassuring. I just always assumed that the phrasing that they could “claim” citizenship because of me meeting requirements (I was born and raised there) meant she has the option should she want it when she’s older. I just guess I wanted her to have that choice and to not have to be dealing with the tax headache I do every year, or get dinged with double tax things that I’m still learning about. I didn’t want to list her info to try and claim benefits because I felt it was unfair to double dip (we don’t live, work, or pay taxes there, why should we benefit?). But I will likely explore this option with a professional going forward since it looks like we don’t get a say in the matter afterall.
I did have an officer say something to me about it at the airport when I travelled to see my family in the US. I didn’t think anything of it because the wording he used made it sound more like the way my dad sounds when he talks about getting her citizenship because “US is the best.” Not because I legitimately am supposed to. Thank you again for bringing this to my attention.


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## Harry Moles (11 mo ago)

I was generally opposed to documenting dual citizen childrens' US status until I did the math. Quite apart from a lump-sum payment of at least $2500 for the pandemic, if you began putting the child tax credit straight into an RESP from year of their birth, you'd probably have well north of $60k set aside for their education by the time they turn 18, at no cost to you. Not a bad deal.

As to your airport experience, yes, you are "required" to register your child's birth and obtain a US passport. Whether it's flagged again in future is an open question.

As for it not being "fair" to get benefits from the US, **** that, if they want dual citizens and expats filing returns no matter where they live, they can pay for the privilege.

Your daughter can easily drop off the IRS radar again at 18 and never needs to worry about US tax obligations if she never wishes to move south of the border. With a Canadian birthplace on a Canadian passport she's FATCA-proof anywhere in the world.

If you decide not to register your daughter's birth before she turns 18, be sure to set aside all the documents she would later need to obtain a US passport as an adult, should she choose to do so.


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## MyExpatTaxes (10 mo ago)

SarahCanUS said:


> Hi,
> I was hoping someone might be able to answer a question about my situation so I can decide whether to hire a professional or not. Money is tight for me these days unfortunately.
> I’m a US citizen/Canadian PR that has been living in Canada for 10 years. I work and live in Canada and my only ties left to the US are my family and a meager savings account I haven’t closed yet but has <$1000USD. I am employed by a Canadian employer, my family (spouse and child) lives here with me and are all Canadian citizens (not US citizens or residents or anything). My life is here.
> My mom is an accountant and has been keeping my US taxes current since moving abroad, and i have filed my FBAR yearly as well once I met criteria. This year I decided it was time to learn to do them myself. I don’t own my own business, have rental properties, investments beyond my foreign pension and RRSP, so I felt they would be fairly straight forward.
> The only year that was not straight forward was the 2020 year. My grandparents passed away and I was left with a small inheritance in the form of a Roth IRA which I chose to cash out because I did not want the headache of dealing with a US retirement account when I don’t anticipate ever living there again before I die. Federal taxes were withheld and paid on it, it was all reported, etc. The issue I have run into now is that I also discovered that my mom was using TurboTax for my taxes all along because she was too prideful to admit to me that she didn’t understand expat taxes fully. She has been using form 2555 for me all these years (which is correct, I’ve never made more than the exclusionary limit). I’m unable to understand though if there was a chance that I could have used form 1116 instead of 2555 and basically cancelled out the IRA taxes between carry overs considering my tax rate in Canada is quite a bit more than in the US. Can anyone tell me if that’s even possible, or if the IRA taxes would be exempt since they’re not wages necessarily? I am hesitant to hire a professional because 1) spending thousands of dollars to have someone review my mom’s work isn’t in my budget if it isn’t going to net me back some of that money spent on those taxes, 2) I am low key terrified my mom has actually been making massive errors that are beyond my comprehension and by pursuing this, I’m opening myself up for audits and penalties and fees which I also can’t afford. If it isn’t possible, I would rather let it be and let sleeping dogs lie I guess? Thanks for any insight. I unfortunately am finding the tax rules extremely confusing and I am not terribly financially literate. I also feel like since I did get a letter from the IRS for my 2020 taxes saying I owed like $120 because of the covid stimulus money, that the rest of the taxes should be correct.


Your current year (2021) return doesn't sound complicated, <snip>
Regarding 2020, if you received a notice because of the stimulus, rest assured the rest of the return is deemed correct. You had Fed tax withheld on your distributions, so you should be covered. I think you slightly misunderstands the FEIE. It excludes up to 108K of earned income. You doesn't need to reach any type of threshold.I hope that helps! 😊


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## 255 (Sep 8, 2018)

@SarahCanUS -- Just to add -- concerning the inherited Roth IRA: if you cashed it out, there should have been zero taxes, assuming your grandparents held it for the requisite five years. They already paid tax on the principal and Roth distributions are tax free, as long as all the rules were followed (at least on the U.S. side.) Cheers, 255


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