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Ed Johnson
Ed Johnson, Tax Preparer
Category: Tax
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Experience:  GPHR Cert; U.S. Treasury Tax Advocacy Panel appointee
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If I live outside of the US, and am not a US Citizen/Green ...

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If I live outside of the US, and am not a US Citizen/Green Card Holder/Resident: Do I pay income tax on my IRA withdrawls from an IRA account opened while working in the US? Am I taxed ONLY on my IRA withdrawls, or on my world wide income? Do I have to pay State Income tax? What tax rates do I pay? Please tell me which publications also contain the details on this.
Submitted: 8 years ago.
Category: Tax
Expert:  Ed Johnson replied 8 years ago.

Dear neil,

Thank you for your question.

I need to know what country you are from. this is because I want to provide the appropraite tax treaty treatement of your situation.

I also need o know how many days you have spent in the U.S. over the past 5 years? have you always lived abroad, when did you last depart the U.S.

Was the IRA part of an employers retirement plan form a time when you worked in the U.S.?

Customer: replied 8 years ago.
I am a Canadian Citizen.

I have been working in the US for 10 years (and living here during that time).

I plan to continue working & living in the US for many more years.

This question is more geared towards my tax strategy for when I do leave the US to retire (in probably 5-10 years).

I have a 401k plan from the company, and plan to roll over to IRAs as I shift jobs, and when I quit.
Expert:  Ed Johnson replied 8 years ago.

Dear Neil,

There is a July 2008 change to tax treaties.

The changes include:

Since you have been living and working in the U.S. you are treated as a resident.

When you retire and leave the U.S. with your money rolled into an IRA account, provided the laws do not change by then, the taxing is directed by treaty.

There are provisions also for transfering 401(k) to an IRA and subsequent transfer of an IRA to an RRSP.

By treaty, if your Roth IRA distributions would not be taxable in the United States, they  would also not be taxable in Canada.  Roth IRA distributions, are in fact, tax free, because they were established with after tax contributions. There for if the money is in a ROTH IRA, there will be no tax on distributions.

NOTE: except for rollovers, if you make contributions to the Roth IRA while resident in Canada, your Roth IRA will be bifurcated, with the portion contributed while you were in the U.S. being received as distributions without tax, and the portion of distributions related contributions while being resident in Canada as being taxed.

Under the new rules, you would be taxed on your regular IRA distributions from the U.S. IRA account, and on the canadian side, since this is retirment benefits, you would add the income to your Canadian income tax return, and take a tax credit for taxes paid to the U.S.

 

Ed Johnson and 5 other Tax Specialists are ready to help you
Customer: replied 8 years ago.
To clarify the key point:

The US will not consider my world wide income, when it comes time to tax me on my IRA withdrawls? They will ONLY be concerned with the US source income? At what tax rate will they tax me? (Is there a different rate for non-resident non-citizens?). Do you know which publication refers to this?
Expert:  Ed Johnson replied 8 years ago.

Dear Neil,

They will not tax your world wide income because you are not a legal permenent resident or U.S. Citizen. They will tax only the U.S. sourced income.

For witholding, because you would be a non-resident once you left the U.S. the adminsitrator would have to withhold 30 percent unless you complete a form W8-BEN before departing the U.S. to get a determination. This form is asking for tax treaty benefits which says you would be taxed on your IRA distributions at the same rate had you been a U.S. Citizen.

There are a number of publications that deal with this.

1. Tax guide for Aliens: http://www.irs.gov/pub/irs-pdf/p519.pdf

2. Tax Treaty: http://ftp.irs.gov/pub/irs-trty/canada.pdf

3. Employer withholding guide: http://www.irs.gov/pub/irs-pdf/p15.pdf

4. IRA arrangements http://www.irs.gov/publications/p590/index.html

5. Form W8-BEN http://www.irs.gov/pub/irs-pdf/fw8ben.pdf

6. Instructions W8-BEN http://www.irs.gov/pub/irs-pdf/iw8ben.pdf