# My first and prolly not last tax question



## SuzieF (Feb 3, 2014)

I like many of you found out 2 weeks ago I was supposed to be filing US taxs and fbars.
I've been a resident of canada since 2001 and a citizen since 2006.

I've ordered from Ebay all my back years of turbo tax and I'm hoping once they arrive all this will become evident, but for now I'm having DAILY PANIC attacks, so here goes.

Yearly income is about 50g from a normal job. I have 120k combined in my savings! rrsp, and tfsa. Not worried about the interest on the tfsa and rrsp as they don't amount to much.. What I'm trying to figure out is I get about 2000$ in interest yearly from my normal savings.. Which in Canada is added to my earned income which I pay tax on.

I understand for the IRS I get an exemption for my earned income, but have to pay tax on the unearned income from the interest on my savings.. I also understand that since I have already paid tax on the unearned income I can take a credit for that tax... How do I know how much I was taxed in canada just on that unearned income, when all my income was lumped together?

Thanks!


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## Bevdeforges (Nov 16, 2007)

To start with, go to the IRS website (Internal Revenue Service) and download the instructions for form 1116 (which is the form you use to claim the tax credit). I believe you are supposed to file a separate form 1116 for each source of income (so, interest income separate from earned income). There should be something in the instructions about how to figure the tax you paid on the interest income.

But it has been years since I last filed a 1116. The Turbo Tax stuff should have something about this.

Oh, and by the way, if you have just found out about your tax obligation, you can probably just backfile 3 years - not the whole time since you became resident in Canada. If those returns show little or no tax due, you may be absolved for the prior years. 
Cheers,
Bev


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## SuzieF (Feb 3, 2014)

Is there a standard deduction on the 1040 that would deduct from the $2000 interest income?


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## maz57 (Apr 17, 2012)

SuzieF said:


> Is there a standard deduction on the 1040 that would deduct from the $2000 interest income?


Yes, there are 4 ways that I know of to reduce your taxable income for IRS purposes: The personal exemption, the standard deduction, the Foreign Earned Income Exclusion, and the Foreign Tax Credit. The first two are claimed on your Form 1040 and the second two are claimed with Form 2555 or Form 1116 respectively. (There may be other ways but probably not relevant in your case.)

Turbo tax should lead you through these. Your RRSP and your TFSA are more problematical as they are foreign trusts from the IRS point of view. Canadian RRSPs can be dealt with on Form 8891; once you have elected to defer they receive the same tax treatment as they get in Canada. (Maybe better, because you only pay tax on the gains at withdrawal, not principal.) 

The TFSA could be a major problem depending on the exact structure of the account. If it really is a trust, that triggers all the ridiculous trust reporting (Form 3520, etc.) If on the other hand it's a simple savings account or acts like a simple savings account, just report the interest and leave it at that. Do you get an annual statement from the trustee of the TFSA? If not, I'd treat it as a savings account and report the interest accordingly. (In my reporting my TFSA was lumped in with several other accounts all under one account number. I simply tallied all the interest together and reported the total. No need to confuse the IRS about things that aren't really any of their business anyway.)

But, and I can't stress this enough, no need to panic about this. It's very unlikely you would owe US tax and if there is no tax owing there is no penalty or interest.  The only thing you are guilty of is not realizing that the US treats it's expat citizens unlike any other country in the world. You are hardly the first to discover this best kept secret of the US government. 2013 taxes aren't due until June 15, 2014. (You get an automatic filing extension if filing from abroad. Canada is abroad from the IRS point of view.) My guess is you could file 2013 plus 2011 and 2012 plus 2013 FBAR (you know about FBAR, right?) showing zero balance owing and that's it. 

But take a deep breath, take your time, do your research, put together your plan and then put it into action. May I suggest that even though you are planning to use TurboTax, go ahead, download and print out a 1040. You can fill it out in pencil to see how everything fits together. You can download the instructions at the same time. (No need to print, it's a thick booklet.)


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## SuzieF (Feb 3, 2014)

Thanks so much.. I do feel obligated to go back to 2008, as I sold my deceased parents home in the us that year. I don't think I will owe much.. It acquiring was split into two 1/2s..the first half I received in 1999 when my mother died so it will be long term cap gain the other half I received when my brother died in 2008 and sold it immediatly so it will be short term cap gain( actually that half is a wash ). I'm afraid if I don't go back to 2008 and declare this that it's going to bite me.. I've never heard a word but who knows if the IRS filed one of their own returns on me for that year. With the standard and personal deduction the gain will be minimal.. So why not fix it all while I'm doing it.


Yup.. I now know about fbars and the penalties on those are what's causing my panic attacks. I read a posting here that said no one is aware of any astronomical fines that have actually been imposed. Also if I file 2008. Re the house sale that is where my fbars start and it will show the source of the income.


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## maz57 (Apr 17, 2012)

Well, that's a complication to be sure. I'm surprised the realtor didn't withhold part of the proceeds at the time of the sale. I thought that was standard for sellers who don't live in the US. 

I assume that you are aware that inherited assets receive a step in cost basis upon transfer, which means you are only on the hook for the increase in value since inheriting your 1/2 in 1999, not since your parents acquired the house. And as you say, the gain on your brother's half would be minimal, possibly even a loss which could help offset the gain on your half. 

This is yet another thing that deserves thorough research, not a panicked response. There is an exemption for the first 250k of a gain on a personal residence, but I'm not sure your situation would qualify. (But then, maybe it would; no one expects you to immediately live in a house you just inherited. It's not exactly your personal residence, but it's not a rental house, either.) Another consideration is that the house sale may well result in tax owing. That would generate interest and possible penalties on top of that. 

Others on this forum may have further insight; hopefully they'll chime in. And always remember, this is a forum where expats try to help each other navigate the complexities of the US tax code. It's certainly not legal advice! Even though it's incredibly dull and tedious, your best option is to fully understand the IRS rules that appply to your situation.


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## SuzieF (Feb 3, 2014)

Yes I was aware of the stepping up upon my getting my half in 1999, and I did sell the half I got upon my brothers death at a loss..just so I didn't have to deal with it.

I played with turbo tax tonight, and I do not think it did it right. I have a gain of $9500,but the program took my form 2555 foreign earned income that I exempted( it printed it out as a -40000 and deducted the gain for a total of -35000. As much as I would like to agree.. Don't think so LOL too tired tonight I will deal with it tomorrow.


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## SuzieF (Feb 3, 2014)

Oops I meant -30500...


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## Bevdeforges (Nov 16, 2007)

SuzieF said:


> Is there a standard deduction on the 1040 that would deduct from the $2000 interest income?


The (very) basic sequence for doing a return from overseas is to report your salary income on form 2555 and take the FEIE to eliminate that to the extent you can.

Carry over the original salary income to line 7 on the 1040 and put the FEIE amount in parens on line 21. You then report the interest income on the appropriate lines, depending on the source, etc.

When all that is done, your AGI (Adjusted gross income) should be just the amount of non-salary income you've reported. Flip over the form to the back side and take your personal exemption (based on filing status) and the standard deduction (also based on filing status). That should give you something between $8000 and $15000 to subtract from your AGI to get your taxable income to $0 or less. 

If you have income over and above that, you need to go with the Foreign Tax Credit. But if that's sufficient to knock out your taxability, it's the quickest and easiest way to go. 
Cheers,
Bev


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## SuzieF (Feb 3, 2014)

Thanks guys.. I figured out why the program was giving me a minus for my foreign earned income instead of just putting it at zero..so I got that fixed.

LOL now it's trying to give me a $300 economic stimulus credit of $300! Without this stimulus credit my tax is very low like $150 which is fine.. I think I would be much better off sending in my late tax of $150 knowing I will prolly have to pay some interest than sending in a return asking for a refund of $150 because of that stimulus credit!


All other years are just my earned income from the one job I've had here in canada since 2004.


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## BBCWatcher (Dec 28, 2012)

SuzieF said:


> LOL now it's trying to give me a $300 economic stimulus credit of $300! Without this stimulus credit my tax is very low like $150 which is fine.. I think I would be much better off sending in my late tax of $150 knowing I will prolly have to pay some interest than sending in a return asking for a refund of $150 because of that stimulus credit!


You have another choice: take the credit you're entitled to but send in the return asking for $0. Which is the only choice available for tax years 2009 and prior at this point in time (as I write this).


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## SuzieF (Feb 3, 2014)

BBCWatcher said:


> You have another choice: take the credit you're entitled to but send in the return asking for $0. Which is the only choice available for tax years 2009 and prior at this point in time (as I write this).




I was able to trick the program into leaving it out by checking that I had received it in a previous year.

So the little I gained on the half of the property I owned since 1999 was eaten away to zero by the standard deduction and persona exemption and the second half I sold within a few weeks of receiving it was actually a loss.. Tho I can't take a loss as I didn't live there.. So all in all I feel pretty good about this so far! The only slight concern I have is coming up with the basis on my half I got from mom when she passed in '99. It was a life estate so no probate had to be done.. Thus no formal valuation. When my brother passed I had a valuation done ( and the new owner sold the property within 6 months for $75,000 more! So I know I'm good there). I've spent days googling and have sited 6 or so documents I found basing the last 10 years appreciation at 4% yearly in that state and county. so I deducted 4% off each year from the acquisition of the second half back to the date I got the first half.. And that 4% yearly added to the year I sold the place, comes up to about exactly what Zillow says today's value is.


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## BBCWatcher (Dec 28, 2012)

That narrative went right over my head, but OK. 

What I mean is that on the paper forms you can take that credit if you need it. Then, when you get to the very end and it asks you to write in the amount of refund owed to you, you can write in zero if you wish. That's on line 73 in the 2013 edition of IRS Form 1040.

I'm not necessarily recommending you skip collecting a refundable tax credit you're entitled to, but if you want to skip it that's where you can do it. If you'd otherwise be writing a non-zero number on line 73, just write in zero.


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## maz57 (Apr 17, 2012)

Looks to me like you are coming up to speed nicely on all of this! I think what BBC is saying is that the window for claiming those credits for past years has closed. I think after three years has passed the credit can no longer be claimed, even though you would have otherwise qualified for it if you had filed on time. So you do the calculation but don't bring it down to the bottom line and actually ask for a refund. (BBC can correct me if I've got it wrong; he always does, lol!)

In view of the fact that no appraisal was done at the time, there is really no choice but to use your own numbers to arrive at a valuation for when you inherited your 1/2 of the house from your mother. It might be possible to obtain a year by year record of the assessed value for property tax purposes just as a rough check on your calculations. Keep a record of how you arrived at your value in case it's ever an issue. I doubt that the IRS will ever dispute it.


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## SuzieF (Feb 3, 2014)

I thought of that assessment for property tax purposes, but they are so far off in that state. I would guess by more than half. There are many exemptions for hardship and homesteading, I downloaded a chart from the assessor office and in 2008 the max exemption was $100,000! 

That's my only worry year the rest is all cake! Finally this is the first day in 2 weeks with no panic attack... Its so unfair we have to worry like this!


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## Bevdeforges (Nov 16, 2007)

Just a quick question: How far back are you filing? Because there is a statute of limitations of (I think) 4 years. If you're going for streamlined or quiet disclosure, I wouldn't file any farther back than what the requirement is - simply because if your back filings are accepted without comment, you're seriously off the hook for the prior years.

I have a tax preparer friend who advises her clients to shred most tax records older than 4 years if their filings are up to date. 

But on the basis of the house, just use some form of logical and rational approach (probably based on the appraisal you had done) and keep a record of how you calculated it. Chances are you'll never need it, but if any questions arise, you can "show your work."
Cheers,
Bev


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## SuzieF (Feb 3, 2014)

Bevdeforges said:


> Just a quick question: How far back are you filing? Because there is a statute of limitations of (I think) 4 years. If you're going for streamlined or quiet disclosure, I wouldn't file any farther back than what the requirement is - simply because if your back filings are accepted without comment, you're seriously off the hook for the prior years.
> 
> I have a tax preparer friend who advises her clients to shred most tax records older than 4 years if their filings are up to date.
> 
> ...


I think Bev that the statute of limitations are on filed years.. If there is nothing filed there is no limitations?

If I don't file the house sale year isn't it going to look really odd on the fbar forms going from zero to 100,000 plus in one year?

If I file 5 years im good to go if I should decide to renounce


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## maz57 (Apr 17, 2012)

Bev, I thought the SOL never kicked in for a tax year where there was undisclosed income. 

While it's true that SuzieF would probably be fine back filing for the usual 3 years, if she can go all the way back and cover the house sale without having to pay a lot of tax, why not just clean it all up and sleep easy at night? If it were a Canadian house, I'd say yeah, forget about it. The fact that the house was in the US increases the chances of popping up on the IRS radar I would imagine.

At the very least she might as well figure all the missing years to see what the tax bill would be before making the final call as to how far back to file.


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## Bevdeforges (Nov 16, 2007)

If your intention is to renounce, that changes everything - however don't worry too much about them tying your FBARs to your tax filings. Two separate departments of government and to date they show little or no evidence of cross referencing these things. FATCA may change things a bit, but you haven't indicated anything about having a FATCA filing involved.

And yes, while the statute technically runs on returns filed, once you have backfiled sufficiently to get "amnesty" (or whatever you want to call it), the earlier returns will not be called into question unless there is some kind of major policy change at the IRS. (And a major enhancement to the IRS budget.)
Cheers,
Bev


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