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Lane
Lane, JD, CFP, MBA, CRPS
Category: Canada Tax
Satisfied Customers: 10149
Experience:  Providing financial and tax advice for 30 years
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I am a dual US and Canadian citizen who has resided solely

Customer Question

Hi. I am a dual US and Canadian citizen who has resided solely inCanada since 2004. I have always filed a timely US tax return but never had to pay US tax as I am retired with minimal income that I pay taxes on in Canada. This past tax year I sold my rental property located in Canada and paid capital gains tax on the sale of about $25000 US. I declared the gains on my US return expecting I would not owe any money to the IRS since the tax owed on the US return was only about half of what I paid to Canada. I went to fill out a Tax credit Form 1116 to get credit for the Canadian taxes paid and much to my shock the IRS forces you to adjust your capital gains by various fractions such that you only get a partial credit at best and I would owe them several thousand dollars above what I already paid revenue Canada.
JA: When we are ready I'll take you to the appropriate web page.
Customer: Thank you for any help you can provide. It seems very unfair especially when PUB 514 says the credit is to prevent double taxation which is what this blatantly is.
JA: The Accountant will know how to help. Is there anything else important you think the Accountant should know?
Customer: I do not think so other than I was wondering if I was filling the form out wrong or if it just that the IRS wants some of your capital gains regardless of tax you have already paid on them to other countries. In my case they say I owe about $15000 but only allow a tax credit of about half that even though I have the $25000 I paid Canada available for credit.
JA: OK. Got it. I'm sending you to a secure page on JustAnswer so you can place the $5 fully-refundable deposit now. While you're filling out that form, I'll tell the Accountant about your situation and then connect you two.
Submitted: 6 months ago.
Category: Canada Tax
Expert:  Lane replied 6 months ago.

Hi,

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Yes, so sorry, this IS one of the bigger IRS "gotcha's" for Dual status AND US residents having income from Canada.

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Just so that you can do a reality check the limitation works like this:

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"Your foreign tax credit cannot be more than your total U.S. tax liability multiplied by a fraction. The numerator of the fraction is your taxable income from sources outside the United States. The denominator is your total taxable income from U.S. and foreign sources."

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So, given that... there are two other thing to keep in mind. FIrst in the event that you have had r will have a different situation;if you have foreign taxes available for credit but you cannot use them because of the foreign tax credit limit, you may be able to carry them back to the previous tax year and forward to the next 10 tax years. Refer to Carryback and Carryover in Publication 514, Foreign Tax Credit for Individuals

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Also, you can look at the foreign tax DEDUCTION.

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Expert:  Lane replied 6 months ago.

I hope this has helped.

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Please let me know if you have any questions at all.

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If this HAS helped, and you DON’T have other questions … I'd appreciate a positive rating (using the faces or stars on your screen, and then clicking “submit")

I know it takes an extra step, but JustAnswer won’t credit us for the work until you rate.

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Thank you!

Lane

I have a law degree, with concentration in Tax Law, Estate law & Corporate law, an MBA, with specialization in finance & tax, as well as CFP® and CRPS designations. - I’ve been providing financial, Social Security/Medicare, estate, corporate, both for-profit and non-profit, and tax advice on three continents, since 1986.

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