Taxes making me cry Dual-Status or 1040 for the year

I'm sure this has been beaten to death but I have been talking to both the IRS and CRA for the past two weeks and I thought I was making progress until a lady at the IRS today laughed at me and said I should get an accountant.

My husband and I are canadian citizens and moved to the states on June 24th to work on a TN status. I believe we meet the substantial presence test to chose between a dual status or straight up 1040 for the whole year.

I was tempted to go the 1040 whole year but Steven on this forum seems to caution about moving your tax home to the states. None of the agents at the CRA or IRS brought this up and now I'm scared of doing so. What exactly are the documents we will have to fill out. We will realistically probably be heading back home this year but we're not positive as the company has applied to extend the TN for three years. So I don't want to fill out form NR 73 yet as we're not sure of what date to put down as the return.

The problem is, I don't believe my husband can claim me as an exclusion if we file dual-status documents. The flip side is that with the 1040 we have to declare world income and both of us worked in Canada. We have the option of going with an expensive accountant but there is no gaurantee they understand anything about the treaties (neither do I). So my question is, is there a way that can help determine if we should file as dual status or residents for the entire year. And can someone please discuss how the treaty affects this decision. None of the IRS agents seemed to want to discuss the treaty.

A few other notes: we do not own property in Canada. However, we do have bank accounts and credit cards which a CRA agent said can be acceptable if you want to have non resident status as they are convenient. My husband still has some investments however.
I do not work in the states (but had a job in Canada for 2008). I do not have a SSN but will submit form W7 to apply for the ID number when filing.

Are there good cross border tax accountants anyone can recommend if you also have a desire to laugh at me trying to figure this out myself?


THANK YOU SO MUCH!

Even the IRS doesn't know how to do it, frankly, if you want to get into the nuts and bolts of it. Last time I asked them they said they were going to refer it to legal counsel, because with TN-1 it's a grey area legally as to how you have to file.

However in your situation if you're going to move back this year, there's no point to dual-status unless you want to kill yourself with paperwork, just file a 1040NR for last year and an 8833 and ditto for this year.

Otherwise you'll end up filing dual-status for 2008 and 2009, the only reason to do that is if you save a lot on taxes. (If you do this it could mean as many as eight tax returns and a minimum of six, because you have to file a T1 for both years for the portion of the year you were in Canada, and a 1040 and a 1040NR for 2008 and 2009 - if you had Canadian-source income you might have to file dual-status in Canada as well which would be eight tax returns).

You can file jointly on 1040NR.

Then you just file jointly on T1 in Canada for wherever you're from, and claim a foreign tax credit on form T2209. There probably will be additional Canadian tax to pay as the rates are usually higher in Canada.

If you're in a State with State income tax, you may have to claim a Provincial foreign tax credit as well, the general guide for the T1 includes the instructions.

The only thing you really need help with from the IRS is filling in the Form 8833, call the non-resident dept. in PA and ask them for help or try and figure it out from Publication 901 if you really want to.

IRS publication 519 has the rest of the instructions if you decide you're going to save a lot of money filing dual-status or it turns out you're staying for longer (in which case filing dual-status may be sensible). But frankly if you need an accountant to fill in those six to eight returns, I'll be surprised if you save money.

Also read this as it's fairly easy to understand: http://www.cra-arc.gc.ca/E/pub/tg/p151/README.html

Hi Steven,

Thanks so much for replying. Could you please elaborate on why filing as dual status if we were staying longer is better?

As well, in your second paragraph you say that there's no point in filing dual status but to file 1040NR. I thought you only file 1040 NR if you are filing as dual status and if you were filing as residents for the year you only have to fill out 1040?

And if we do fill out 1040 only as residents for 2008, do we still need to fill out 8833?

Thanks again!

Hi,

Actually, we just reread pub 519 and we were here for 185 days in the US. So not sure why the IRS people we called said we qualify for Dual-Status. We are actually residents for the entire year. I imagine we have to fill out 1040 only and then 8833. And probably cannot use TurboTax or software to file?

Thanks again.

You are dual-status, if you meet the substantial presence test (if not, you can choose to be). You could have entered on January 2nd and have to file a 1040NR for January 1st and a 1040 for the whole of the rest of the year (read page 8 of publication 519).

However you don't have to become a tax resident of the US because of the tax treaty and I doubt it's a good idea in your situation given you're not sure how long you're staying.

There are various approaches to it, you have a choice, but how I personally would do it is to simply file as a non-resident for the whole of 2008 and claim tax treaty status on Form 8833. Then you only have to file two tax returns, a T1 for wherever you're from and a 1040NR. You can use Quicktax for the T1 if you must use software, but if you've only got W-2s and 1099s as US-source income then filling in 1040NR should take about 15 minutes, because you're only declaring your US-source income on it. The 8833 is the tricky one.

Whether it makes sense to do this or not depends on how long you plan on staying and how much tax you would save as a US resident.

However, assuming you do it the way I'd do it, and it turns out next year you're still in the US and you plan on staying for awhile, then all you have to do at that point is to simply phone the CRA and tell them you moved your tax home to the US on Jan. 1st 2009, make sure you've cut residential ties to Canada (i.e. no DL, healthcare card, etc.) and then just file a regular 1040 return like the average American.

Then you don't have to file dual-status at all, until you move back to Canada at any rate. Plus you're not locked into filing dual-status at all, for example you could if you wanted decide to file as a non-resident for the whole of 2009 instead of filing a 1040 if that works to your advantage. If you file dual-status for 2008 then you will definitely have to file dual-status when you leave (unless you move on Jan 1st).

Personally I'd do the T1 manually, I haven't tried using software to do one in this situation, but the general guide for the T1 is pretty comprehensive and explains how to claim a foreign tax credit, covert the amounts on your W-2s, etc. I'm sure even with software you'll have to do that bit manually so it doesn't really help to have it.

Steven how do you have the patience to reply to these questions over and over again? many thanks!

So basically you're saying we could be in the states for 185 days and still use the treaty to pay taxes in Canada and not in the states. No wonder the IRS won't tell you this option!

My husband however, is hell bent on filing the entire year as a resident of the US because of saving money on his income. He doesn't want to pay Canadian taxes. I'm guessing if we do this, then we're declaring ourselves automatically non residents of Canada? Or does this depend on when we file our T1 we have to check the date we left Canada or else they assume we owe taxes on our US income when we return.

I guess we're trying to have our cake and eat it to. Essentially, what's wrong with this scenario:

We file as residents for the entire year in the states, report our world income and ask for tax credit for what we've already paid in Canadian taxes.

We file Canadian taxes for the part of the year that we were in Canada until June 24 (Ontario). Wait to see if they complain about us still being liable to pay Canadian taxes on US income and hope for the best.

When we come back to canada next year, we will file dual status in Canada and US for 2009?

Or am I completely missing the point here?

You can't file that way because you weren't resident in the US for the first part of the year. You would be lying and claiming full-year deductions you're ineligible for and in any event you would be filing as a resident of both countries, which makes you ineligible to claim a foreign tax credit in either country.

So basically you're saying we could be in the states for 185 days and still use the treaty to pay taxes in Canada and not in the states. No wonder the IRS won't tell you this option!

I think you misunderstand, any way you file you will be paying US taxes on your US-source income at a minimum. The IRS already has the taxes they want, they've already been withheld as shown on your W-2. If you file as a non-resident, you pay the difference between the US taxes and the Canadian taxes on the T1.

If you want to save money, how you do it is you file a T1 pro-rated for the portion of the year you were in Canada (i.e. up until June 24th) and your personal exemptions and deductions will be reduced to that portion of the year;

Then on the US end you would file dual-status, a 1040NR for the first part of the year (which will most likely be zero I'm assuming) and a 1040 for the year after June 24th. The personal exemptions and deductions will be pro-rated to the 185 days you were in the US.

So in essence you file three tax returns, one in Canada and two in the US. If you have Canadian-source income that is subject to reporting after June 24th you would have to file a non-resident T1 for the period from June 24th as well.

Whether it's worth going to all this hassle depends on how much money you reckon you're going to save but you cannot file as a US resident for the whole year, and you cannot recover the Canadian taxes already withheld for the first half of the year via a US foreign tax credit, because the taxes in Canada are higher and withheld on Canadian-source income from employment done in Canada.

Thanks Steven, again! I guess I thought we could file as residents for the entire year because you can make that choice in the first year of arrival (I am referring to publication 519 page . That way you can claim the tax credit for the income in Canada.

Incidentally, I should point out to anyone else who reads this, California does not allow you to claim tax credits on foreign earned income

You do claim to be resident, but that means you file dual-status, because it's the portion of the year that you were resident.

We're in the same situation. Moved to US in May of 2008. We'd like to avoid dual-status for 2008 and electing to file 1040 as US residents.

It's impossible to do this because you were in Canada for the first five months and had residential ties to Canada. You can either file as dual-status in the US and file a pro-rated T1 for the first five months of 2008, or you can file a T1 for the whole year and file a 1040NR and 8833 for the seven months you were in the US.

Dual-status is cheaper but more complicated. Also it means you may be subject to departure tax in Canada. http://www.cra-arc.gc.ca/tx/nnrsdnts/nd ... n-eng.html

Do you think it is correct to only report US income on 1040 form and not include income earned in Canada from Jan-Apr 2008? (not interested in claiming tax credits, just want to minimize paperwork) And file Canadian income tax return as non-residents and only show Canadian income that we earned from Jan-Apr 2008. Before leaving Canada we have severed all ties to Canada, closed all bank accounts, etc.

You can't file a non-resident T1, because you were an actual resident for the first five months. There's no real advantage to doing it that way anyway because you pay a similar amount of tax and the CRA won't believe you were non-resident unless you filed a TD-1 with your employer in January saying you were non-resident. You can't recover the Canadian income tax you've paid in the US. If you were in Canada and the tax was withheld for direct employment, then it belongs to the CRA regardless of where you reside.