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A pension question on US tax, pls? If a US citizen works in

A pension question on US...
A pension question on US tax, pls?
If a US citizen works in Canada and participates in RPP (registered pension plan), but has no way of knowing how much the employer contributes in it, because the employer just pays a large sum amount to the pension management company, without allocating it to each employee, should this employee still report employer's contribution on his 1040? If so, how to do it? BTW, on the employee's pension statement, the contribution made in that year represents employee's portion only. The total balance for that year only considers contribution by the employee and earnings in that year.
Thanks
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Answered in 8 minutes by:
12/23/2012
Megan C
Megan C, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 16,581
Experience: Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
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Thanks for asking your question! I'm sorry to hear about your tax issue and I'm going to try my best to help you understand or resolve it.

Thank you for your question, and thnk you for using JustAnswer.com. You will not pay tax on your pension contribution from your employer on your 1040 - you will pay income tax once you start getting pension benefits.

So no - do not report the employer's contribution to the pension plan. Once you draw benefits - THEN you will pay income tax.

Thank you for your question, and please let me know if you need anything else. Have a happy, and safe holiday season.

** Please take a moment to rate my response as "Excellent" so that I may be compensated for assisting you today. Please let me know if my assistance was anything less than "OK Service", as I am compensated based on whether or not I have assisted you with your issue. If you need further clarifications, PLEASE WAIT TO RATE MY ANSWER UNTIL AFTER RECEIVING FOLLOW UP FROM ME. If I receive anything less than OK Service, I do not get paid. Thank you for your kind understanding in this matter. If you have difficulties rating, then simply respond stating that you are having difficulties rating and thank me for my excellent, good, or ok service and we can get the rating applied by the site**

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Customer reply replied 4 years ago

Thank you for your quick response. Could you possible refer me to a IRS or treaty source why the employer's contribution is not taxable?

Thanks very much.

Please take a moment to read the following link CLICK HERE.

Changes to the Fifth Protocol allow this treatment. Please let me know if you need any further assistance.

Thank you for using JustAnswer.com and have a happy, and safe, holiday season.

** Please take a moment to rate my response as "Excellent" so that I may be compensated for assisting you today. Please let me know if my assistance was anything less than "OK Service", as I am compensated based on whether or not I have assisted you with your issue. If you need further clarifications, PLEASE WAIT TO RATE MY ANSWER UNTIL AFTER RECEIVING FOLLOW UP FROM ME. If I receive anything less than OK Service, I do not get paid. Thank you for your kind understanding in this matter. If you have difficulties rating, then simply respond stating that you are having difficulties rating and thank me for my excellent, good, or ok service and we can get the rating applied by the site**

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Customer reply replied 4 years ago

Thank you for your reference. But this person has been in Canada over 20 years. But the Fifth Protocol applies to the person who is in Canada less than 5 years and it allows that person not only exempt employer's contribution from taxable income, but to deduct it on US tax return. Do I understand correctly?

I'll refer this to a Canadian tax expert - I cannot find anything on the differences you discuss (living there 20 years vs commuting). Maybe someone out there will know the difference and be able to guide you.

Thanks again for using JustAnswer.com and have a happy, and safe, holiday season.

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Customer reply replied 4 years ago

Could you refer my question to another US tax accountant, as I don't think a Canadian tax accountant knows how to report it on US return. Thanks and Merry Christmas to you!

will do.
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Customer reply replied 4 years ago

Thanks!

You're welcome
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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 12,842
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Hi. I can help with this.
Article 18 covers pensions and annuities.
Article 18 (XVIII) of the tax treaty between the U.S. and Canada provides the following:
Paragraph 1 provides that ...
"a resident of a Contracting State is taxable in that State with respect to pensions and annuities arising in the other Contracting State. However, the State of residence shall exempt from taxation the amount of any such pension that would be excluded from taxable income in the State of source if the recipient were a resident thereof."
further down in the same (fairly short) article, pensions are defined and either the pooled or the old RPP fit that definition.
You will not report the income in the U.S. until you begin receiving payments or other withdrawals from the pension.
see this:
http://www.irs.gov/pub/irs-trty/canatech.pdf
hope this helps
positive feedback is appreciated
Lane
(Feel free to come back here for clarification or to bookmark this page for future reference)
Lane
Lane, JD, CFP, MBA, CRPS
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Thanks for the feedback.
Glad we could help.
To ask for me again, just say “For NPVAdvisor” at the beginning of you question OR enter it here:
http://www.justanswer.com/finance/expert-npvadvisor/
…pleasure working with you !
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Customer reply replied 4 years ago

Thank you! May I also ask if the contribution is not taxable on 1040, per previous expert's answer, when the person start to withdraw from the pension, it would be taxable. What I understand is that the total withdrawal will become taxable, no matter initial contribution or accrued income in the plan. Am I right? Now, only accrued earnings would be reported on 1040 each year (eg, 2k interest income each year). When he withdraws from the pension (eg, 10k each year), how would he know how much belongs to the income which is already reported on 1040, and how much belongs to the contribution which hasn't been reported?

Thanks again!

FIRST, all contributions (either by employee or employer) that are made pre-tax ... and in qualified retirement plans ALL employer contributions are a business deduction, hence, made pre-tax.

SECOND, the interest, growth, investment manager gains from buying and selling securities inside the plan, etc., are also tax deferred. (not taxed as they happen).

The plan administrator apportions that growth to your account according to the term,s of the plan. In defined contribution plans that as accounted for and applied to your account all along the way.

In defined benefit plans the dollars are simply pooled, and you receive benefits based on things like how long you worked for the company ... or a percentage of you highest three years of earnings, etc.

The tax is paid when distributed from the plan.

All qualified retirement plans, in both this country and Canada work this way.

And, because of the tax treaty between the two countries, that retirement distribution is only taxed once (not in BOTH countries).

Finally, ALSO in both countries, if there is an option for the employee to contribute on an AFTER-tax basis, that portion of the retirement contribution is tracked as a defined contribution plan and NOT taxed when distributed.

Lane

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Customer reply replied 4 years ago

If the interest earned in the plan is not taxable, where should I report the deferral? What I know is form 8891 will be used to defer RRSP and RRIF only, where to defer interest earned in RPP? And could you also point me the source of the ruling, pls?

Thanks again.

You don't report deferral of interest.
It is either tracked as part of the account in a defined benefit plan and taxed when distributed
or
used in the pool to provide benefits based on a retirement criteria and taxed as part of that earned benefit.
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As to a source, this is part of the plan design, not an issue of taxation.
The taxation aspect, again, is really quite simple.
(ALL INTEREST THAT ACCRUES TO YOU IS TAXED WHEN PAID OUT AND EITHER ACCOUNTED FOR DIRECTLY OR IS POOLED AND TAXED TO YOU INDIRECTLY).
The individual does not account for earnings (unless they're being paid out).
This is a fundamental aspect of all qualified retirement plans in both countries.
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Customer reply replied 4 years ago

This is a defined benefit plan and form 3520A should be reported because it's invested in Canadian mutual funds. On form 3520A, interest earned in the plan should be reported. So, what you mean is even the income is reported on form 3520A, it shouldn't be reported on 1040 and IRS won't penalize it?

Well, your answer is logical. But since I'm not sure whether IRS has complete rules to govern Canadian pension plans, eg, how do I know that RPP is qualified pension defined by IRS, I think I would better be cautious to quote the source in case I'm questioned by IRS.

Thanks again.

I agree. This will call for a little more documentation, I believe, because I'll need to dig into plan design issues, which will drive the answer you're looking for.
Then we should be able to connect the dots.
My intuition, however, says that - in a defined BENEFIT plan, where general pooled dollars are not accounted for at all, but rather used to provide an actuarially defined benefit obligation to - it would be physically impossible to report.
I do understand that 8891 asks for interest (where it can be provided), but let me do a little more homework ... I'll be here all day. Hang with me, if you will.
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Customer reply replied 4 years ago

Sure, I will be online. Thanks very much!

OK, here we go. I've pinned it down.
US taxation of your plan actually depends on whether it satisfies US qualifications for US-based plans, (which, actually, is made difficult by the complexity of the US law, as it relates to retirement plans.
So, at the onset US citizens and residents are generally taxable under the Code on income accrued or earned in a Canadian retirement plan, (hence form 8891) even if the income is not currently distributed.
Income earned by a plan that satisfies certain requirements under Canadian law is not subject to Canadian income tax until its distribution from the plan, so a resulting timing mis-match occurs.
The timing mismatch between the taxation in the two countries COULD cause an individual to suffer double taxation unless available treaty relief applies.
As I already mentioned above, Canada-US treaty article XVIII (pensions and annuities) deals with this issue.
Specifically, however, look at Article XVIII(7), which allows a US citizen or resident to elect to defer the current US taxation of income accrued in certain Canadian retirement plans until its distribution and thus eliminate the timing mismatch.
The election may be made for arrangements generally exempt from income taxation in Canada and “operated exclusively to provide pension or employee benefits” subject to rules established by the IRS.
IRS Rev. proc. 2002-23 (2002-15 IRB 744) provides rules for the treaty election only with respect to so-called eligible plans which are the following: a Canadian registered retirement savings plan (RRSP), a registered retirement income fund (RRIF), a registered pension plan (RPP), and a deferred profit-sharing plan (DPSP).
Before the introduction of form 8891 in 2004, a US beneficiary could attach an election statement to his or her US tax return in accordance with Rev. proc. 2002-23, that practice applies to make the election for an RPP and a DPSP.
The election is irrevocable for the taxable year in which it is made and all subsequent taxable years.
A separate form 8891 or election statement must be filed for each plan.
If both spouses must file form 8891, each must file a separate form.
Lane
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Customer reply replied 4 years ago

Excellent! Should I file form 8833 or just a drafted statement to make this election? There is no room on form 8891 to make election for RPP.

Thanks!

8833.
Always best to use their forms and procedures, where possible.
(Don't want to confuse them) :)
Thanks for pressing on.
This will make it easier for others.
I know having the context helps ME.
http://www.irs.gov/pub/irs-pdf/f8833.pdf
Lane
Lane
Lane, JD, CFP, MBA, CRPS
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Customer reply replied 4 years ago

Thanks a lot. I hope you don't mind the small tip as my appreciation. Merry Christmas and have a wonderful holiday!

No no. It's a wonderful thought.
I really enjoy working with people who think critically (think well: http://www.criticalthinking.org/)
We all benefit.
Merry Christmas to you as well.
Lane
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Customer reply replied 4 years ago

Thank you. I enjoy discussing with you as well. May I contact you directly in the future if I have other tough US tax questions?

Regards

Lucia

The TOS on the site prohibit us from direct contact.
The system even automatically xxx's out emails and phone numbers.
However, I'm check in here every day. As long as you say "for NPVadvisor" at the beginning of the question OR go to my JustAnswer profile page and enter your question in the question box, I'll get the alert.
Thank you!
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Customer reply replied 4 years ago

Thanks for letting me know!

By all means.
If you do have something, I hope you'll ask for me.
Have a great Christmas!!
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Customer reply replied 4 years ago

Hi: Lane

May I have another question, pls?

Regarding software amortization (by using straight line method), should it be prorated by months if it's put in service during the year, (eg, starting to use in Aug, so to have fraction of 5/12), or half year conversion can be used (eg, by using fraction of 0.5)?

I found in PUB946, there is a paragraph like this:


Straight Line Method


This method lets you deduct the same amount of depreciation each year over the useful life of the property. To figure your deduction, first determine the adjusted basis, salvage value, and estimated useful life of your property. Subtract the salvage value, if any, from the adjusted basis. The balance is the total depreciation you can take over the useful life of the property.

Divide the balance by the number of years in the useful life. This gives you your yearly depreciation deduction. Unless there is a big change in adjusted basis or useful life, this amount will stay the same throughout the time you depreciate the property. If, in the first year, you use the property for less than a full year, you must prorate your depreciation deduction for the number of months in use.

So, I'm a little bit confused, why half year convention not used, but strictly prorated by months?

Thanks

I would use 5/12.
In terms of tax compliance, you have p.946 as your backup.
Half year is an accounting convention, but, again, in terms of managing your risk around tax compliance the IRS Pub will win out.
Lane
Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
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Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Thanks so much!
You make it easy.
Lane
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Customer reply replied 4 years ago

Thank you for your neat and fast answer!

You're welcome!
Thanks for staying with me.
Lane
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Customer reply replied 4 years ago

Hi: Lane

How are you?

I discussed with you about how to report RPP on US tax return before. Now, I have a question about whether it's needed to be reported on Form 90.22-1. Could RPP be treated as "Defined benefit retirement accounts held by employers" and therefore exempted from reporting on form 90.22-1? And Could I possible still get the source, pls?

Another question is if a bank account is jointly owned by the couple (husband is a US citizen, wife is not) and it's the only account they have; the maximum balance is 12k, should the husband report it on Form 90.22-1 if considering the total amount over 10k, or he doesn't have to considering he owns 50% of the balance?

Thanks very much.

OK, here's what I have so far.
Lots of logical exemption, but nothing specific as of yet:
Is the RPP a defined benefit plan" (We all know it is)
A little backup ...
From Benefits.org, re: RPP
SEE: http://www.benefits.org/interface/benefit/rpp.htm
"Withdrawal Prior to Retirement Age
The pension plan must specify the rights of a member upon termination of employment other than by death or retirement. It is common to provide full rights (vesting) to benefits at the normal retirement age for members with two years of plan membership. Terminating employees may transfer the commuted value of the vested pension to another RPP or prescribed RRSP (with limited settlement options and locked in until they reach retirement age less 10 years)."
So, by any knowledgeable pension expert’s definition, the RPP is a defined benefit plan, when what we already know about the actuarial nature of the plans benefit calculations is then complimented by this restricted withdrawal ability and control.
Add to that, the purpose of FBAR (see bottom of form 90.22.1). This is not an account where the pensioner has the kind of control that can be used in the manner that the FBAR is INTENDED to report and manage.
However, from the IRS, we see:
SEE: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/FAQs-Regarding-Report-of-Foreign-Bank-and-Financial-Accounts-(FBAR)---Filing-Requirements#FR2
"Q. Who must file an FBAR?
A. Any United States person who has a financial interest in or signature authority or other authority over any financial account in a foreign country, if the aggregate value of these accounts exceeds $10,000 at any time during the calendar year..."
So again, even though the purpose of the FBAR is to manage and report accounts where there is significant control, the very definition from thn IRS is "HAS A FINANCIAL INTEREST OR signature authority."
So by logic, financial interest carries the same weight as control.
Finally, to close in ...
In a Fullbright & Jaworski L.L.P analysis entitled
"FBAR Reporting for Pension Plans and Welfare Benefit Plans"
SEE: http://www.fulbright.com/index.cfm?fuseaction=publications.detail&pub_id=4923&site_id=494&detail=yes#_ftnref6
May 20, 2011
It was stated that. “Participants and beneficiaries in retirement plans described in section 401(a), 403(a) or 403(b) of the Internal Revenue Code of 1986, as amended do not have to file FBAR reports for Reportable Accounts held by or on behalf of such plans. Participants and beneficiaries who are not covered by this exemption should determine whether they are exempt from FBAR filing on the basis that they do not have a “financial interest” in the Reportable Accounts.”
Is RPP described in 401(a), 403(a), or 403 (b)?
And in another place in the same Paper …
"No Blanket Exemption for Pension Plans and Welfare Benefit Plans. The government declined to grant a blanket exemption from FBAR reporting requirements for pension plans and welfare benefit plans."
The footnote on this was “The government did, however, grant a blanket exemption for certain governmental plans”
Which governments?
It is late and I am obviously not there yet. But at this point the task is to make a determination as to whether a foreign plan could be the object of 401(a), 403(a) or 403(b) OR whether there is some other specific exemption. Short of that, it appears that they must report (to take the conservative approach).
On the second question I'm afraid that on is a little easier if we read the IRS Q & A above: " ...has a financial interest in or signature authority or other authority over any financial account in a foreign country, if the aggregate value of these accounts exceeds $10,000 at any time during the calendar year...)
Ownership percentage doesn't matter: they BOTH have a financial interest in an account that had a balance over 10,000 in the year (and this is just one account).
I must now lay me down to sleep. but once again, if you'll hang with me, I'll get back on the RPP piece tomorrow. That one will take a little reading, as I do not know of a specific exemption, and my gut, at this point, says that "retirement plans described in section 401(a), 403(a) or 403(b)" doen't apply.
Get back on it tomorrow. OK?
Thanks,
Lane
Thanks for thinking of me.
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Customer reply replied 4 years ago

Thanks for your quick response. I agree with you. But the following is the response my client received from IRS <*****@******.***>


Who must file an FBAR.

A United States person that has a financial interest in or signature authority over foreign financial accounts must file an FBAR if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year.


Defined benefit retirement accounts held by employers or governments do not generally need to be reported by the individual. These are generally NOT held in the individual's name. However, foreign defined contribution retirement accounts held by the individual (similar to IRA) should be reported. These accounts are generally held in the individual's name, so meet the #1 Financial Interest definition in the instructions to the form.

Does it mean RPP is not required to be reported?

Thanks again!
That ties in completely with what I was trying to say in the first section. ... RPP is held by a custodian, for providing an actuarially calculated future benefit. ... It's not something that they can '"control." ... Completely logical.
Although I disagree with the last sentence they gave in the explanation, (not with the instruction, but with this field person's explanation), because they DO have a financial interest,, it's just the kind of future interest that the FBAR wasn't meant to manage/report.
But, yes. It does mean that the RPP doesn't need to be reported.
Once again ... We do good work together!
Lane
Lane
Lane, JD, CFP, MBA, CRPS
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Customer reply replied 4 years ago

Thanks a lot! How about the account jointly owned by the couple? To only consider half of the balance or the whole balance for the husband to decide whether to report form 90.22-1? Although, I know once form 90.22-1 is required to be reported, the 100% balance should be reported by each person although owned jointly.

Thanks again.

No, you have to report the whole balance for both. Looking at each ...
Wife: do you have a financial interest in an account that is ....
Husband: do you have a financial interest in an account that is ...
(The size of the interest doesn't doesn't matter)
The size of the account does.
They each have an interest in an account that qualifies.
Thanks again for asking for me!
Lane
Lane
Lane, JD, CFP, MBA, CRPS
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Customer reply replied 4 years ago

Hi: Lane

May I have another question about form 3520, pls?

If a Canadian citizen went to USA with TN visa, he needs to file 1040 because he lived in 2012 over 183 days, should he file form 3520 if he has RESP in Canada?

Thanks

Gonna have to do some homework on that one.
He hasn't transferred anything right?
You're just asking whether the RESP would qualify as a foreign trust? (Box C)
He's not a transferor or receiving a distribution right?
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Very Quickly, here are the IRS EXCEPTIONS to the need to file:
Exceptions To Filing
Form 3520 does not have to be filed to report the following transactions.
Transfers to foreign trusts described in sections 402(b), 404(a)(4), or 404A.
Most fair market value (FMV) transfers by a U.S. person to a foreign trust. However, some FMV transfers must nevertheless be reported on Form 3520 (e.g., transfers in exchange for obligations that are treated as qualified obligations, transfers of appreciated property to a foreign trust for which the U.S. transferor does not immediately recognize all of the gain on the property transferred, transfers involving a U.S. transferor that is related to the foreign trust). See section III of Notice 97-34, 1997-25 I.R.B. 22.
Transfers to foreign trusts that have a current determination letter from the IRS recognizing their status as exempt from income taxation under section 501(c)(3).
Transfers to, ownership of, and distributions from a Canadian registered retirement savings plan (RRSP) or a Canadian registered retirement income fund (RRIF), where the U.S. citizen or resident alien holding an interest in such RRSP or RRIF is eligible to file Form 8891, U.S. Information Return for Beneficiaries of Certain Canadian Registered Retirement Plans, with respect to the RRSP or RRIF.
Distributions from foreign trusts that are taxable as compensation for services rendered (within the meaning of section 672(f)(2)(B) and its regulations), so long as the recipient reports the distribution as compensation income on its applicable federal income tax return.
Distributions from foreign trusts to domestic trusts that have a current determination letter from the IRS recognizing their status as exempt from income taxation under section 501(c)(3).
Domestic trusts that become foreign trusts to the extent the trust is treated as owned by a foreign person, after application of section 672(f).
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Customer reply replied 4 years ago

Hi: Lane

He hasn't transferred anything right? (He contributes a certain amount each year in RESP for his son, who is also a Canadian citizen)

You're just asking whether the RESP would qualify as a foreign trust? (Box C) (I know RESP qualifies, what my concern is whether a person who just became a resident alien because of 183 days rule still needs to do so, or only US citizen or greencard holder needs to report foreign trust such as RESP?)

He's not a transferor or receiving a distribution right? ( I think he is a transfor, per my answer of the first question, am I right?)

Thanks again

Ok, should have understood he was contributing.
Yes, he's a transferor.
And because the TN visa is still a temporary visa (although renewable) my understanding is that tax residency and having the visa are independent of each other.
So if he has to file the 1040, he now should file 3520.
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Take a look at this:
http://www.tnvisaexpert.com/articles/nafta-tn-visa-tax-residence-examples/
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Once again, I'd like to dig into this, but getting late for the 8:00 (eastern time here) appt. I have in the morning.
Do NOT know the answer off the top.
From what I'm reading so far it seems that even though TN is treated differently that Green card, the residency rule trumps.
Let me know what you see, and know.
I'll be checking back in and jumping on this to pin it down after that meeting .
...nothing else with a time on it tomorrow
Hope that's OK
Lane
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OK. I cannot find any exemption that fits, since, because of the 183 day rule, he’s a US person for this purpose.
And since it is a trust, (and since your client has a right to the funds (corpus) if the beneficiary - the son - doesn't qualify to use it), your client has a general power of appointment, so it’s a grantor trust under IRC 679.
There IS an exemption to the grantor trust rule; creating and funding the trust more than five years before becoming a resident. But, it’s not clear that this would apply because he’s still contributing.
But since this isn't a tax form anyway, it’s sent to the treasury for declaration purposes, I would err on the side of compliance and file. It won’t create any tax filing problems.
Hope this helps you.
Lane
Positive feedback (or an “accept”) is highly appreciated. That’s the only way we’re paid.
However, if you have QUESTIONS, or need clarification, COME BACK here, so you won’t be charged for another question.
:)
Lane
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Thank you so much!
Enjoy ...
Lane
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Customer reply replied 4 years ago

You are very welcome. May contact you later....

Lucia

Sounds good, Lucia
I'll be here
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Customer reply replied 4 years ago

Hi: Lane

May I have a resident alien or non-resident alien status question, pls?

If a Canadian citizen has family members, house, and all assets in Canada. Per Canadian tax law, he is a Canadian resident for tax purpose. He worked in US and stayed in US over 183 days in 2012. Per US- Canada tax treaty, if a person can qualify as residents for both countries, he will be recognized as a resident for one country. In this case, could he be non-resident alien for US tax purpose even if he lived in US over 183 days? Thanks

Hi,
IRS uses a doctrine called substance over form.
I bet I'd be able, better, to answer your question, if you told me why this is desired?
What is the objective ... why does it matter?
Thanks
Lane
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Customer reply replied 4 years ago

I'm just confused with the answer from an accountant and US-Canada tax treaty. Per treaty, it's clearly stated that a person only needs to be treated as a resident in one country, but from the answer of an account, I got a different one. I'm wondering whether I missed some points, or didn't understand the treaty correctly? This is all info and facts. No purpose of avoiding tax, but to file correctly.

Thanks

Ok, I would agree with your assessment, generally
The reason I asked is that many times tax treaties treat different types of income differently, or sometimes make the person pay the higher of the two, or provide reduced rates for certain types of income (for example, a Mexican only pays tax on earned income at his Mexican rates and to the Mexican govt.but pays a reduced rate on dividend and capital gain on accounts held a US brokerage firms.
So I guess that I was asking tax resident for what purpose? For example, would bet that if a person changes how he files from year to year, because of changes in income level that make one or the other more advantageous, that would not be allowed ...substance over form.
A better example is under US tax law, an S-Corp owner can not just say she's taking money from her company in the form of a dividend (form)and not pay herself a salary, just to escape self employment taxes. The IRS will re-characterize some portion of that money as the reasonable salary that someone with her responsibility and duties has and make her pay payroll taxes on that money (substance).
In terms of your understanding of the treaty you are absolutely right, but I bet if I understood the transaction that's being called into question, I could better help you go back to the accountant and tell them why what they are saying is wrong
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Customer reply replied 4 years ago

The details are:

The husband worked in US in 2012 for the full year. The wife and kids are in Canada. The husband only had employment income in US. He has little or none interest income in Canada. That's it. In 2011, his return was prepared by a big firm, claiming he was a non resident alien, because he has strong residential tie in Canada. I don't know exactly how many days he was in US in 2011, but this is the statement clearly indicated in the file to the client and I assume this firm took into consideration about the tax treaty, no matter substantial presence test passed or not. I recall if correctly that I confirmed with IRS with a very similar case (by calling them), and was told that this kind of person should be treated as resident alien instead, that confused me very much, because it seems it's conflict with the treaty. Then I verified with another experienced accountant and got the same answer - to treat as a resident alien and file 1040. I guess maybe I missed some points with the understanding of the treaty?

Thanks again.

Thanks Lucia, inn a dinner break right now but will be digging in after about 8:00 at the latest. I'm sure I can get something back to you tonight
Hope that's OK.
Lane
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Sorry, not to be coming back with an answer, I have two things:

(1) a question, and

(2) something I'd like you read just to see if it clarifies (or even goes to show that there IS significant gray area):

(1)

HERE's THE QUESTION

From the treaty:

"For the purposes of this paragraph, an individual who is not a resident of Canada under this paragraph and who is a United States citizen or an alien admitted to the United States for permanent residence (a "green card" holder) is a resident of the United States only if the individual has a substantial presence, permanent home or habitual abode in the United States,..."

Notice that they say green card holder...

Is this the person that was on the TN Visa, and could that be the difference, that this TN (NAFTA driven) Visa is an exception to residency?

I remember seeing somewhere that if it was suspected that IF the continual renewal was suspected to be an effort at being a green card "in effect," the renewal could be denied.

Is this that same person?

(2)

HERE'S THE PARAGRAPH (FOLLOWING THE PARAGRAPH QUOTED ABOVE) FROM THE TREATY ... SEE IF THIS MIGHT SHOW THAT ITS NOT CUT AND DRY:

Where by reason of the provisions of paragraph 1 an individual is a resident of both Contracting States, then his status shall be determined as follows:

(a) he shall be deemed to be a resident of the Contracting State in which he has a permanent home available to him; if he has a permanent home available to him in both States or in neither State, he shall be deemed to be a resident of the Contracting State with which his personal and economic relations are closer (centre of vital interests);

(b) if the Contracting State in which he has his centre of vital interests cannot be determined, he shall be deemed to be a resident of the Contracting State in which he has an habitual abode;

(c) if he has an habitual abode in both States or in neither State, he shall be deemed to be a resident of the Contracting State of which he is a citizen; and

(d) if he is a citizen of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.

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Customer reply replied 4 years ago

Hi: Lane

Sorry to reply you late. I was pretty busy last night with family issue.

No, the person is not a greencard holder. He went to US by TN visa.

He is not the person "that if it was suspected that IF the continual renewal was suspected to be an effort at being a green card "in effect," the renewal could be denied."

That's the paragraph in the treaty I'm confused.

Thanks again.

that's what I was asking ... Whether or not this was the TN Visa person.
That's the only thing I can come up with that might make his situation atypical.
I agree with you, and disagree with what the accountant said.
I was just wondering if the TN Visa might make things different ... Nd allow him more easily to use Canadian residency.
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Customer reply replied 4 years ago

Ok. Thanks. I called IRS and was confirmed that he could file as a non-resident. Good to solve this problem!

Lucia, when you get a chance, let me know the reasoning they gave you.
I'd like to reconcile this with what we've seen.
I'm guessing it was that the TN Visa is a temporary/NAFTA driven visa ... a little different "animal," along with the close ties, family and domicile in Canada?
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Customer reply replied 4 years ago

Yes, a Canadian who takes TN visa to USA would be considered temporarily leaving Canada. What I understand for Canadian ties is if family members are here, it means the persona has strong residential ties in Canada. Considering other factors, eg, assets, etc, will eventually conclude this person has to be a resident for Canadian tax purpose. When I told the IRS officer the above facts, he just said if he is a Canadian resident, he could be claimed as non-resident alien of 1040NR even he stays in US over 183 days and attach the form 8833 with the return. Very simple answer.

Thank you!
...thought the TN might have something to do with it, as it is considered temporary and viewed more as a work assignment issue
Thanks for getting back
DO not rate.
Talk to you later ... And have a good evening.
Lane
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Customer reply replied 4 years ago

Hi: Lane

May I have another US personal income tax question, pls? If a non resident alien bought a rental property in US. The family member accompanied him when traveling to US when the house is bought, could the family member's travel expense be claimed as well if that family member is not the owner of the rental property?

Thanks

The only way it would make any sense is if the person accompanying him actually charged a fee for their expertise, regarding the investment income property.
IF this were allowable, (and if audited I'm sure the IRS would want to see that the person being paid reported it as earned income in their own system), it MIGHT be as one of the allowable "other Expenses" ...
... reportable as "other expenses" under miscellaneous itemized deductions subject to the 2% of AGI limit. On Schedule A (Form 1040), line 23, or Schedule A (Form 1040NR), line 9):
Specifically:
INVESTMENT FEES AND EXPENSES*
You can deduct investment fees, custodial fees, trust administration fees, and other expenses you paid for managing your investments that produce taxable income.*
*http://www.irs.gov/publications/p529/ar02.html#en_US_2012_publink100026974
I would be much more worried about the fact that in that same publication, IRS Pub 529, that the specifically disallow this:
TRAVEL EXPENSES FOR ANOTHER INDIVIDUAL*
*http://www.irs.gov/publications/p529/ar02.html#en_US_2012_publink100027032
Unless the individual had some training, knowledge, and/or expertise, AND reported that income, I think you'd be closer to the latter than the former.
Let me know if I've missed something (I'm assuming the person you asked about files 1040 or 1040NR
Thanks,
Lane
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Customer reply replied 4 years ago
Thank you. I don't think the family member is an expert. Then, it's not deductible I guess.
No, should not.
You finally gave me an easy one. :)
Lane
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Customer reply replied 4 years ago

Hi: Lane

May I ask a question regarding rental loss, pls?

I'm not sure whether 25000 rental loss has to be used if actively participating? For example, is the total loss is $60k, and the taxpayer doesn't have any other income. Should he use 25k loss in the current year anyway and carry forward 35k to the future years or he can carry forward the whole loss of 60k to the future years? Could you refer me to any IRS guide, pls?

Thanks

Lucia


First, rental real estate activities are passive activities.

And deductions or losses from passive activities are limited. …general rule is that you can’t offset income, (other than passive income), with losses from passive activities.

But if “actively participating,” there’s an exception to the “you can only use passive losses offset passive income rule”

IRS definition of active participation is the following:

Active participation. You actively participated in a rental real estate activity if you (and your spouse) owned at least 10% of the rental property and you made management decisions or arranged for others to provide services (such as repairs) in a significant and bona fidesense. Management decisions that may count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and other similar decisions.

From IRS Pub 527: “If you or your spouse actively participated in a passive rental real estate activity, you can deduct up to $25,000 of loss from the activity from your nonpassive income”

So, IF they are actively participating, then they can deduct the 25K against other income … otherwise, they have to carry forward until they have other PASSIVE income to use this passive loss against.

Here’s the general area of pub 527, Ch.3. You’ll have to read down a little:

http://www.irs.gov/publications/p527/ch03.html#en_US_2012_publink1000219118


And here’s the link to Ch3 of P. 527 (Reporting rental income, expenses and losses):

http://www.irs.gov/publications/p527/ch03.html

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Sorry for the formatting Lucia,

I had it all spaced out well, with lots of white space, in a word document, and then pasted.

All the formatted was lost ... and then even after editing and adding additional spaces, it still "crunched" all the lines together.

Maybe next time, lets handle by going to NPVAdvisor and just typing it in as a new question.

But again, 25,000 is the exception to the passive loss rules, The rest has to be carried forward until they have passive income with which to use the remaining losses.

Lane
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Customer reply replied 4 years ago

Thank you, ***** ***** may refer to your page directly later on.

I guess what you mean is he has to have 25k loss in this year, and can only carry 35k in the future, even he didn't have any other income, correct?

But when I read the IRS you referred, I noticed,

"If you or your spouse actively participated in a passive rental real estate activity, you can deduct up to $25,000 of loss from the activity from your nonpassive income. This special allowance is an exception to the general rule disallowing losses in excess of income from passive activities. Similarly, you can offset credits from the activity against the tax on up to $25,000 of nonpassive income after taking into account any losses allowed under this exception."

So, if he doesn't have any income or tax to offset, he still needs to recognize 25k loss due to active paticipating? It sounds not reasonable.

Thanks again.

No, what it's saying is that he can not use ANY passive losses against OTHER income, such as earned income, self employment income from another business, etc.

He can only use passive losses to offset (against) passive income.

But for someone who's materially participating they have an exception, where they can deduct up to 25,000 against ALL other income (whether that income is passive or not), and then they can not use whatever remaining passive loss they may have from this year until the have passive income sometime in the future.

Believe me, IRS would rather they not deduct at all. I know of no statute, treasury reg, revenue ruling or tax court decision that REQUIRES a deduction.
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Customer reply replied 4 years ago

So, in my case, he can carry the full 60k loss to future years, right (Rental is the only income (or loss) reported on his 1040NR)?

That's right, carry forward until there is income of some sort (can then use up to 25,000 against any income).

Lets say he has 30,000 of earned income next year. He will only have a taxable income of only $5000.

Then, if in the following year, he had another 30,000 of earned income, but also had 5,000 of passive income, he would use the rest of it.

(Always deductible against passive income activity income, and up to 25,000 each year against other all other income) ... until it's all used up.
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Customer reply replied 4 years ago

Thanks a lot!

You are welcome!

Good to hear from you.

Lane
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Customer reply replied 4 years ago

Sorry to bother you at this busy time, Lane. I tried to open a new window for new questions, but found it's hard to have you online at the same time.

May I have a little bit complicated question, pls?

If this person had 500k income from US employer (it's the gross salary on his W2), and he only stays in USA for one month, the rest of the days he stayed in Canada and did work remotely. Could he claim only 1/12 of 500k as US source income and reported 1/12 of 500k on 1040NR?

The reason I ask this question is because he needs to pay AMT if I included all 500k on 1040NR. But per his 2011 situation, he had similar income and he also only spent a couple of months in US, but spent 8 mths in China, and paid Chinese government tax on his salary by his US employer while he was assigned to China to work there. Therefore on his 2011 1040NR, only a small portion of total salary was claimed (say 30k out of the gross salary of 500k), all the rest income were treated as income from China and not reported on 2011 1040NR, although the gross salary on W2 is still 500k.

My question is, should income for a non resident be prorated by days of his staying in US, or some other standard, disregarding of W2 amount?

In addition, by counting how many days in US, should I separate half days and whole days?

Thanks a lot.

Hi Lucia
Be out if a meeting in appx 1/2 hr
Hope that's OK
Lane
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Customer reply replied 4 years ago

Sure, thanks, Lane.

Lucia,
I've looked at your question but I don't see how this person, a US citizen, can get around the requirement that U.S citizens pay on all the worldwide income.
http://www.irs.gov/Businesses/Income-from-Abroad-is-Taxable
Now, this person WOULD qualify for the Foreign earned Income exclusion ($95,100 for 2012) ... and can also exclude housing amounts
Form 2555, Foreign Earned Income
AND if any meals and lodging is provided by the Employer, that may be deductible too, see Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad, and Publication 15-B, Employer's Tax Guide to Fringe Benefits for more information.
But US Citizens dont file 1040NR, that is a tax return for aliens (both resident and non-resident.)
And there are even special rules for former U.S. citizens.
But I am not familiar with a way that a U.S. citizen can get away with NOT filing a US tax return.
Cn you point me to tax treaty article that somehow exempts his income?
For MANY the foreign earned income exclusion and housing exemption wipes out much of the income but not at 500K.
Maybe I'm not aware of a US/Canada tax treaty exemption.
Let me know
Lane
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Customer reply replied 4 years ago

Sorry, Lane. Perhaps I didn't explain clearly at the beginning. He is a Canadian citizen. His family members are all in Canada. He went to US with B2 visa.

Thanks again

I'm so sorry Lucia,

I could have sworn I saw the words ... U.S Citizen.

I'll use he excuse that I was trying to get something back to you quickly and did not pay proper attention to detail. :-)

Let me dig into this a little more ... have you something later tonight or in the AM.

My gut is that your assumption about using actual time spent may be correct as it doesn't appear that this person falls under any exemptions from filing the 1040 NR.... (earned more that 3800 and not on “F,” “J,” “M,” or “Q” visa)

Sorry and thanks
Lane
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Customer reply replied 4 years ago

Thanks!

Have you looked at the FTC (Foreign Tax Credit?) form 1116?

<table border="0" class="equation" style="padding: 0px 1ex;border-spacing: 0px;text-align: left;font-weight: 600;font-size: 14px;font-style: normal;font-variant: normal;letter-spacing: normal;line-height: 21px;text-indent: 0px;text-transform: none;white-space: normal;">Maximum FTC = U.S. Tax Liability xForeign Taxable Income
Worldwide Taxable Incomehttp://www.irs.gov/uac/Form-1116,-Foreign-Tax-Credit
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Customer reply replied 4 years ago

I think at this stage, FTC is not needed, as all his income is from US.

Does he not pay taxes in Canada?
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Customer reply replied 4 years ago

Yes, he does. He is Canadian resident and will pay tax on his US income. All his income is from US.

I just realized where I saw U.S. Citizen ... it always comes up when you keep coming back to this original question. ...

"A pension question on US tax, pls?If a US citizen works ($8) " is what I see when the question first pops up.

OK, SO, the answer, as per the tax treaty is YES.

Although there is something called Effectively connect income, it's not source income unless her earned it IN the US. He only earned 1/12 of that income in the USA ... even though it was paid by a US company.

And 11/12 of the income is not EFFECTIVELY connect income either, because your client is not "engaged: in the business, except for 1 month.

http://www.irs.gov/Individuals/International-Taxpayers/Effectively-Connected-Income-(ECI)

And I don't see any need to worry about half days (if you're talking about the first and last day of that month) that would be considered Di minimus.

BUT, if he was there, say, 10 different times, that ended up being a month total, I WOULD count the half days, as they would now be a material part of the calculation.

Hope this helps

Lane
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Customer reply replied 4 years ago

Thank you. Yes, he is in the situation that he wen to US for different times, each time for around a week. Is it half day rule applies to substantial presence test?

Thanks again

I can find no guidance on that... and I don't think there is any (well, I guess implicit guidance), because if you read the IRS definitions ...

... everything is expressed in terms of "days present."

Doesn't help in your case, but it looks as if that's the intention; if you were present in the US on a day, that counts as a day.

Lane
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Customer reply replied 4 years ago

Alright. So, if box 1 of W2 includes not only salary earned, but also some other benefits, I think I can't simply prorate his W2 by days. What kind of form his employer should provide in order to show split of income coming from US or outside of US? Is it 1042S?

Thanks!

should have been issued by the employer:

Form 1042-S reports taxable federal income and the corresponding federal tax withholding relating to
the following types of income received by U.S. nonresidents:

  • Wage payments made to employees who have claimed tax treaty benefits
  • Tax reportable Fellowship/Scholarship income
  • Service payments made to independent contractors for work performed in the U.S.
  • Royalty payments issued to individuals or entities.
  • Non-employee Prize or Award payments
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Customer reply replied 4 years ago

One more question, pls, Lane. If he works in Canada at home for the rest of the days for his US employer, can he obtain some form from his US employer in order for him to claim home office expense on his Canadian return? If so, what that kind of form is?

Thanks!

ahhh, now you're asking a Canadian tax question :)

Sorry, I don't know of such a form.

In the US, you simply take the home office deduction, and if audited, must show that you worked from home as a requirement of your employment. (such as an employment contract, employment, or job description)

Don't mean to make light, but I think it would come down to what CRA says the record-keeping requirement there would be.
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Customer reply replied 4 years ago

Hi: Lane

May I have a question about how to split employment income between NJ and CA, pls?

A person was employed by a NJ company for 7 months, but she only physically stayed in NJ from time to time with the total days of around one month. She worked in CA for her NJ employer from time to time for one month as well. She also stayed a couple of days in some other states, but for each one, not exceeding 2 days. All the remaining days she stayed in Canada.

She earned 140k in these 7 months. What I understand is 140k should be prorated based on the time she stayed in NJ 1040NR, which is140k / 7 = 20k.

I also understand that for days she stayed in some other states for not more than 2 days, should be reported on NJ 1040NR as well.

My question is, how about the one month for her to stay in CA? Should she report one month salary of 20k to CA or NJ, or both? I searched CA guide, it seems CA is aggressive to tax person who stays there. But I'm not sure about NJ guide.

Thanks very much.

She would be considered a part-year resident ... See this:

How California taxes residents, nonresidents, and part-year residents


  • California
    residents
    - Taxed on ALL income, including income from sources outside California.

  • Nonresidents of California - Taxed only on income from California sources.



Part-year residentsof California - Taxed on all income received while a resident and only on income from California sources while a nonresident.

And looks like the income IS considered source income while she was there ... see this:

Compensation

Wages and salaries have a source where the services are performed. The source of this income is not affected by either of the following:


  • The location of the
    employer where the payment is issued

  • Your location when you
    receive payment

Residents - Include all wages and salaries
earned while a resident, regardless of where the services were performed.

Nonresidents - Include the income for services
performed in California.

And now, does she need to file (use the chart below to check CA source income):


You
are a part-year resident



Your
total taxable California income was more than the amount defined in this chart.



Filing Status



Age as of December
31, 2012*



California Gross
Income



California Adjusted
Gross Income



Dependents



Dependents



0



1



2 or more



0



1



2 or more



Single or head of household



Under 65



$15,440



$26,140



$34,165



$12,352



$23,052



$31,077



65 or older



$20,640



$28,665



$35,085



$17,552



$25,577



$31,997



Married/RDP filing jointly or
separately



Under 65 (both spouses/RDPs)



$30,881



$41,581



$49,606



$24,705



$35,405



$43,430



65 or older (one spouse)



$36,081



$44,106



$50,526



$29,905



$37,930



$44,350



65 or older

(both spouses/RDPs)



$41,281



$49,306



$55,726



$35,105



$43,130



$49,550



Qualifying widow(er)



Under 65



N/A



$26,140



$34,165



N/A



$23,052



$31,077



65 or older



N/A



$28,665



$35,085



N/A



$25,577



$31,997



Dependent of another person(Any filing status)



Under 65



More than your standard deduction



65 or older



More than your standard deduction


* If you turn 65 on January 1, 2013, you are
considered to be age 65 at the end of 2012.

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Sorry looks like the chart lost its formatting:

here's the page:

https://www.ftb.ca.gov/forms/2012_California_Tax_Rates_and_Exemptions.shtml#ifr

Lane

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Customer reply replied 4 years ago

I apologize to reply you late, Lane, too busy yesterday. May I ask why she should be a part year resident, not a non resident to CA. She is a Canadian citizen and all family members are in Canada. She spent more than 200 days in Canada in 2012.

My apologies Lucia,

I was using part year resident rather than non-resident .... (I think probably because both file the NR return).

But, as you can here, there COULD be a difference in the tax effect:

" ... Residents - Include all wages and salaries earned while a resident, regardless of where the services were performed.

Nonresidents - Include the income for services performed in California. ... "

Again, sorry for the mis-speak. I think, here, there is really no difference, other than listing as a non-resident, given the "temporary or transitory purposes" status.

Thanks

Lane

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Customer reply replied 4 years ago

Thank you for clarifying it, Lane. So, for the time she worked for a NJ employer, but actually worked in CA, should she file 540NR or NJ1040NR or both?

Thanks again

Both, only report CA source income on the CA return, and I haven't looked at NJ, but I'd bet you either only report NJ source income or there's a credit for taxes paid to other states there.
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Customer reply replied 4 years ago

Ok, thanks.

I found the following link (pg 11):

http://www.state.nj.us/treasury/taxation/pdf/pubs/stn/fall05.pdf


Nonresidents are subject to tax on

income earned from sources within

New Jersey. Included in the defini-

tion of New Jersey source income

is income earned in connection with

a trade, profession, or occupation

carried on in this State or for the ren-

dition of personal services per-

formed in this State.

What I understand from here is only service provided in NJ is taxable in NJ. Am I right?

Yep, thats it!

Same as CA, ... only source income.

Lane

(Good to hear from you Lucia)
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As always ... thanks much!

I think, Lucia, that you can go here NPVAdvisor

... to ask another question.

just enter the question in the box and it SHOULD come straight to me.

Thanks again,
Lane
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Hi Lucia,
I tried to respond to the question on the more recent thread, but it was locked, for some reason.
Can you ask them to unlock it?
Is there a reason that you always want to follow a previous thread?
You could just use the profile question box again.
Also, one of the moderators said that you can say "For NPVAdvisor Only" as the first line of the question and that will serve to hold it for me.
....
Let me know ....
Now, how can I help this evening?
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Customer reply replied 4 years ago

Hi: Lane

I don't know in which time zone are you in. If it's too late, I will ask you tomorrow.

Thanks

Hi Lucia,
JUST saw this before getting some shuteye..
Eastern time here.
Hope tomorrow's OK...
Lane
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Customer reply replied 4 years ago

Sorry, sure, good night!

Morning Lucia. I'll go back to the newer question to work on that one. Have 2 meeting thus AM, but will be ba on this afternoon
Lane
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Customer reply replied 4 years ago

Alright, thanks!

Lucia,
At the federal level, you first have to run the tests to see if the person is resident or non-resident (green card test, substantial presence test)
The file accordingly.
If this was from a US company, the it's ALL taxable, there's no pro-rating.
If the income is being taxed somewhere else (because of THAT taxing authority's rules) the offset comes by either taking the Federal Tax credit or the deduction (whichever works best ... typically FTC)
Lane
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Customer reply replied 4 years ago

Hi: Lane

She is non resident alien for US tax purpose. Well, I called IRS and was told that it can be prorated, because it's part of compensation. But I can't find such a guide. So confused.

If you want to chat with me, pls let me know.

Thanks

Hi Lucia, I just popped out of a meeting and tried to get something started.

Later this afternoon I'll be out (teaching CE classes this morning).

But, in the mean time I'll link what seems to apply:

From: http://www.irs.gov/Individuals/International-Taxpayers/Taxation-of-Nonresident-Aliens

A nonresident alien's income that is subject to U.S. income tax must generally be divided into two categories:

Income that is Effectively Connected with a trade or business in the United States

U.S. source income that is Fixed, Determinable, Annual, or Periodical (FDAP)

Effectively Connected Income, after allowable deductions, is taxed at graduated rates. These are the same rates that apply to U.S. citizens and residents. FDAP income generally consists of passive investment income; however, in theory, it could consist of almost any sort of income. FDAP income is taxed at a flat 30 percent (or lower treaty rate) and no deductions are allowed against such income. Effectively Connected Income should be reported on page one of Form 1040NR. FDAP income should be reported on page four of Form 1040NR.

Then here, you see what is exempted, for non residents:

http://www.irs.gov/Individuals/International-Taxpayers/Nonresident-Aliens---Exclusions-From-Income

I'm sure that this what allows for what you are calling proration

Specifically, the bottom paragraph on this page says the following:


"Income Affected by Treaties

Income of any kind that is exempt from U.S. tax under a treaty to which the United States is a party may be excluded from your gross income. Income on which the tax is limited or reduced by treaty is included in gross income but taxed at a lower rate. Tax treaty provisions are not automatic and must be elected by the taxpayer. Refer to Tax Treaties for additional information."

DO you know which article deals with this?

If so I can do a little more digging, to get you to the source ... but this is it. The language will not be expressed in percentages, but will probably stat what portion is "deemed to be income from the contracting state" or something to that effect.

Lane
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Customer reply replied 4 years ago

So, Lane, if you agree that stock option exercising income can be prorated. My formula is correct or not?

to refresh your mind, the stock option was granted on Jan1, 2010 and exercised on Dec31, 2012. the 2012 prorated stock option on 1040NR is

100k x (30 days in USA in 2010 + 60 days in USA in 2011 + 60 days in USA in 2012) / (300 work days in 2010 + 300 work days in 2011 + 300 work days in 2012)

Or simply prorate for 2012 days only: 100k x 60 days in USA in 2012 / 300 work days in 2012

Thanks again.

You would need to prorate for the year of the taxable event.

If the income you are dealing with is 2102 income you would only use information from the tax year in question.

Lane.
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Customer reply replied 4 years ago

It sounds reasonable. If I could possible have the guide of calculation, it will be appreciated.

Just broke out Lucia,

Will now start digging in to see what I can find from the treaty on apportionment.
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Customer reply replied 4 years ago

Thanks very much.

OK,
Here's the Canada tax treaty, re: salary and employee compensation ...
ARTICLE XV
Dependent Personal Services
1. Subject to the provisions of Articles XVIII (Pensions and Annuities) and XIX (Government Service), salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State.
2. Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in a calendar year in the other Contracting State shall be taxable only in the first-mentioned State if:
(a) such remuneration does not exceed ten thousand dollars ($10,000) in the currency of that other State; or
(b) the recipient is present in the other Contracting State for a period or periods not exceeding in the aggregate 183 days in that year and the remuneration is not borne by an employer who is a resident of that other State or by a permanent establishment or a fixed base which the employer has in that other State.
3. Notwithstanding the provisions of paragraphs 1 and 2, remuneration derived by a resident of a Contracting State in respect of an employment regularly exercised in more than one State on a ship, aircraft, motor vehicle or train operated by a resident of that Contracting State shall be taxable only in that State.
What this tells me is that the income should be proportional to the time spend in the "contracting state," here, the US.
So if the income (options or otherwise) manifested in 2012 only the proportionate amount (days in US/Total days) should be taxable on the US return.
I read the US Publication (P. 597) on the tax treaty with Canada and it says the same thing... also says that the treaties are reciprocal, and on a quick reading they are both have the same effect, both have the $10,000 floor, etc.
Canada: http://www.fin.gc.ca/treaties-conventions/USA_-eng.asp
US: www.irs.gov/pub/irs-pdf/p597.pdf
So it's a simple ratio of money earned while in the US, which can only be determined mathematically by days spent working/total days (All taxable income)
Hope this helps
Lane
As Always, positive feedback appreciated :)
Lane
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Customer reply replied 3 years ago

Hi: lane

I don't know whether you still remember that before we discussed whether 3520 & 3520A required for a defined benefit pension plan. The conclusion is if there is no contribution or withdrawal, then it's not necessary to file them.

Somebody challenge that defined benefit pension plan qualifies for IRC 402(b) exemption, therefore not necessary to file at all. Would you agree?

No rush tonight. Tomorrow is appreciated.

Hi Lucia,

... just saw this

... will be tomorrow

... thanks

Lane

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Customer reply replied 3 years ago

Sure!

Lucia,

It's not as QUITE as simple as whether or not it's a money is distributed or not, it really has to do with truly having an ownership interest and/or no signature authority over it.

But, to be certain there are a couple of ways to be sure you're OK here:

(1) BE sure it's truly employer funded and Employer administered, (it's that the plan was CREATED under 402(b), NOT that is has a 402(b) exemption)

Best way to do this is to speak with the plan's administrator, and ask whether this plan is a "funded employee benefit trust" governed by IRC Sec. 402(b), which specifically exempts the trust from being treated as a foreign grantor trust, ... consequently, NOT requiring the administrator to send the 3520. The plan administrator should know this.

(2) You'll also need to know whether the plan would be discriminatory, under US Laws.

The tax treatment of the pension (or deferred compensation plan) under IRC Sec. 402(b)depends on whether the trust is discriminatory towards highly compensated employees. A highly compensated employee is defined broadly as a 5% owner of a company, one who meets a compensation limit ($115,000 in 2013), or an employee whose pay is in the top 20% of compensation for that company.

If it falls into THIS category of plan, then the the exemption is lost and employee would effectively be taxed on the increase in the pension value each year.("employee's "vested accrued benefit," less the employee's investment in the contract or the value of the previously taxed portion of that benefit)

Ask if the plan is or ever has been "top heavy," only one of three different discrimination tests, but this one can be common, doesn't cause any real problems like loss of qualified plan status, hence an issue that is missed by those few that might IN a plan that has a top heavy year AND be a US taxpayer.

A "Top Heavy" Defined Benefit Plan is a plan where on the annual determination date, the present value of the accrued benefits of all key employees exceeds 60 percent of the present value of the accrued benefits of all employees.

However, qualified this way...

... generally, an individual would not have to report a plan that was an employer-administered plan or a traditional defined benefit plan because the individual neither owns the account nor has signatory authority over it.

Hope this helps

Lane

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Customer reply replied 3 years ago

Hi: Lane

Do you refer to the following para in 402(b)?

(3) Grantor trusts


A beneficiary of any trust described in paragraph (1) shall not be considered the owner of any portion of such trust under subpart E of part I of subchapter J (relating to grantors and others treated as substantial owners).

Where is "subpart E of part I of subchapter J (relating to grantors and others treated as substantial owners)."? It seems not in IRC 402.

So, for a deferred profit sharing plan (DPSP), do you think if all conditions mentioned above met, the employee can qualify to be exempt from reporting it on 3520 & 3520A?

Thanks again,
as long as the employee has no signatory authority and no access until retirement
Then he would be exempt as long as the plan does no discriminate to high compensated and he is not in that group
Lane
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Customer reply replied 3 years ago

Thanks, ***** ***** you pls refer me to the guide with which "subpart E of part I of subchapter J (relating to grantors and others treated as substantial owners)" part of it?

So, what I understand is that for all Canadian employer contributed pension plan, including DPSP, RPP, Deferred benefit pension plan, Deferred contribution pension plan, if all conditions are met, meaning employee has no signatory authority and no access until retirement, no discriminate to high compensated, etc...the employee doesn't need to report it on 3520 & 3520A? Sorry to confirm again, so I don't have to verify one by one, as for some plan, the employee needs to make contribution. I will appreciate it if the guide mentioned above can be provided, so will be confident that it's ruling from IRS.

Thanks very much,

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