Question on double taxation

Carllaem · Joined: 06 Feb 2008 Posts: 2

I am hoping one of the US tax experts here can provide me with a bit of
information to help me decide a little financial matter.

I have dual-citizenship Canada-USA, and live in Canada. I also have about
90000 in a 401k account in the US. I would like to take 45000 of that
money out of the account. With my existing pension income (US social
security + private pension), my total income for the year would then be
about 72000.

As usual, I will pay taxes to the Canadian government. Normally, because
of the tax treaty between the two countries, I don't have to bother with
the US revenue agency: in other words, I pay taxes once.

From what I have read, an American citizen living abroad can make up to
about 86000 in *earned income* without being double-taxed by the
Americans.

72000 is less than 86000, so I thought I would be OK in that respect, but
is money taken from this 401k account considered earned income or
something else? If something else, how is it considered for purposes of
taxation, double or otherwise?

Archived from group: us>taxes

Paul Thomas, CPA · Joined: 25 Aug 2007 Posts: 3094

wrote
>I am hoping one of the US tax experts here can provide me with a bit of
> information to help me decide a little financial matter.
>
> I have dual-citizenship Canada-USA, and live in Canada. I also have about
> 90000 in a 401k account in the US. I would like to take 45000 of that
> money out of the account. With my existing pension income (US social
> security + private pension), my total income for the year would then be
> about 72000.
>
> As usual, I will pay taxes to the Canadian government. Normally, because
> of the tax treaty between the two countries, I don't have to bother with
> the US revenue agency: in other words, I pay taxes once.
>
> From what I have read, an American citizen living abroad can make up to
> about 86000 in *earned income* without being double-taxed by the
> Americans.
>
> 72000 is less than 86000, so I thought I would be OK in that respect, but
> is money taken from this 401k account considered earned income or
> something else? If something else, how is it considered for purposes of
> taxation, double or otherwise?

It's not considered "earned income" for purposes of the Earned Income
Exclusion on foreign earned income. You have to be employed, or
self-employed in the foreign country to get that break.

--
Paul A. Thomas, CPA
Athens, Georgia

parrisbraeside · Joined: 25 Aug 2007 Posts: 98

On Feb 6, 11:38 am, Carll...@yahoo.com wrote:
> I am hoping one of the US tax experts here can provide me with a bit of
> information to help me decide a little financial matter.
>
> I have dual-citizenship Canada-USA, and live in Canada. I also have about
> 90000 in a 401k account in the US. I would like to take 45000 of that
> money out of the account. With my existing pension income (US social
> security + private pension), my total income for the year would then be
> about 72000.
>
> As usual, I will pay taxes to the Canadian government. Normally, because
> of the tax treaty between the two countries, I don't have to bother with
> the US revenue agency: in other words, I pay taxes once.
>
> From what I have read, an American citizen living abroad can make up to
> about 86000 in *earned income* without being double-taxed by the
> Americans.
>
> 72000 is less than 86000, so I thought I would be OK in that respect, but
> is money taken from this 401k account considered earned income or
> something else? If something else, how is it considered for purposes of
> taxation, double or otherwise?

The 401k withdrawal would not be part of the income which you could
take the Foreign Income Exclusion since it is not Foreign Income. The
money would be fully taxable on your REQUIRED US tax return. And yes,
you are required to file a US tax return, given the information that
you have provided.

Carllaem · Joined: 06 Feb 2008 Posts: 2

On Thu, 07 Feb 2008 04:34:01 -0800, parrisbraeside@yahoo.ca wrote:

> On Feb 6, 11:38 am, Carll...@yahoo.com wrote:
>> I am hoping one of the US tax experts here can provide me with a bit of
>> information to help me decide a little financial matter.
>>
>> I have dual-citizenship Canada-USA, and live in Canada. I also have about
>> 90000 in a 401k account in the US. I would like to take 45000 of that
>> money out of the account. With my existing pension income (US social
>> security + private pension), my total income for the year would then be
>> about 72000.
>>
>> As usual, I will pay taxes to the Canadian government. Normally, because
>> of the tax treaty between the two countries, I don't have to bother with
>> the US revenue agency: in other words, I pay taxes once.
>>
>> From what I have read, an American citizen living abroad can make up to
>> about 86000 in *earned income* without being double-taxed by the
>> Americans.
>>
>> 72000 is less than 86000, so I thought I would be OK in that respect, but
>> is money taken from this 401k account considered earned income or
>> something else? If something else, how is it considered for purposes of
>> taxation, double or otherwise?
>
> The 401k withdrawal would not be part of the income which you could
> take the Foreign Income Exclusion since it is not Foreign Income. The
> money would be fully taxable on your REQUIRED US tax return. And yes,
> you are required to file a US tax return, given the information that
> you have provided.

Thank you for the reply. I have to say it is confusing, since I have lived
in Canada for 8 years, and have been receiving a US social security
pension, and a private pension, all that time. That is also not foreign
income from the point of view of the Americans, yet I pay taxes on it to
Canada only, without any concern for the US tax agency, and have never
heard a peep out of the IRS.

By the way, the first 3 years or so that I lived here, the IRS used to
send me the 1040 forms, and I duly filled them out, ending up with owing
them nothing, since I always paid the Canadians more than I would have paid
the Americans. After 3 or so years, they didn't bother sending me any forms
and I didn't bother trying to find any to fill out. A very sensible
approach that I would not have expected from a bureaucracy like the IRS.

It is obvious that my pension income falls under the non-double-taxation
provisions of the Canada-US tax treaty, and that the IRS is fully informed
by Revenue Canada that taxes have been paid on the income to Canada, and
that the fact that it is not 'foreign' income, from the point of view of
the Americans, is irrelevant (unless of course by 'foreign' income they
mean foreign from my point of view, which it is).

But your answer, for which I again thank you, makes no sense to me, and my
question remains as to whether or not this also applies to the 401k money.

sgallagher · Joined: 25 Aug 2007 Posts: 7

On Feb 7, 8:18 am, Carll...@yahoo.com wrote:
> On Thu, 07 Feb 2008 04:34:01 -0800, parrisbraes...@yahoo.ca wrote:
> > On Feb 6, 11:38 am, Carll...@yahoo.com wrote:
> >> I am hoping one of the US tax experts here can provide me with a bit of
> >> information to help me decide a little financial matter.
>
> >> I have dual-citizenship Canada-USA, and live in Canada. I also have about
> >> 90000 in a 401k account in the US. I would like to take 45000 of that
> >> money out of the account. With my existing pension income (US social
> >> security + private pension), my total income for the year would then be
> >> about 72000.
>
> >> As usual, I will pay taxes to the Canadian government. Normally, because
> >> of the tax treaty between the two countries, I don't have to bother with
> >> the US revenue agency: in other words, I pay taxes once.
>
> >> From what I have read, an American citizen living abroad can make up to
> >> about 86000 in *earned income* without being double-taxed by the
> >> Americans.
>
> >> 72000 is less than 86000, so I thought I would be OK in that respect, but
> >> is money taken from this 401k account considered earned income or
> >> something else? If something else, how is it considered for purposes of
> >> taxation, double or otherwise?
>
> > The 401k withdrawal would not be part of the income which you could
> > take the Foreign Income Exclusion since it is not Foreign Income. The
> > money would be fully taxable on your REQUIRED US tax return. And yes,
> > you are required to file a US tax return, given the information that
> > you have provided.
>
> Thank you for the reply. I have to say it is confusing, since I have lived
> in Canada for 8 years, and have been receiving a US social security
> pension, and a private pension, all that time. That is also not foreign
> income from the point of view of the Americans, yet I pay taxes on it to
> Canada only, without any concern for the US tax agency, and have never
> heard a peep out of the IRS.

That's because there's a special agreement between Canada and the US
regarding the taxation of social security benefits.

Benefits paid under the U.S. Social Security system to a Canadian
resident
(even if he is a US citizen), are taxable only in Canada. Similarly,
Canada Pension
Plan benefits (the Canadian equivalent to Social Security benefits)
earned by a
US resident are taxable only in the United States, and not in Canada.

So, that is why you don't have to pay US tax on your social security,
despite
being a US citizen.

> By the way, the first 3 years or so that I lived here, the IRS used to
> send me the 1040 forms, and I duly filled them out, ending up with owing
> them nothing, since I always paid the Canadians more than I would have paid
> the Americans. After 3 or so years, they didn't bother sending me any forms
> and I didn't bother trying to find any to fill out.

Even if the IRS doesn't don't send you a 1040, and even if you know
you won't end up
owing any US tax, you still should be filing a return IF your income
exceeds the minimum level for filing. Do not think that just because
you are
not sent a 1040 then you are automatically exempt from filing.

>
> It is obvious that my pension income falls under the non-double-taxation
> provisions of the Canada-US tax treaty, and that the IRS is fully informed
> by Revenue Canada that taxes have been paid on the income to Canada, and
> that the fact that it is not 'foreign' income, from the point of view of
> the Americans, is irrelevant (unless of course by 'foreign' income they
> mean foreign from my point of view, which it is).
>
> But your answer, for which I again thank you, makes no sense to me, and my
> question remains as to whether or not this also applies to the 401k money.

That's because the agreement that exempts your social security income
from
US taxation applies only to social security benefits. Your 401k
distributions,
are considered taxable income by the IRS, and would be subject to US
taxes.
Unfortunately, it cannot be excluded under the foreign earned income
exclusion. You will have to declare those distributions to the IRS
and pay
US tax on them. And, since you are a Canadian resident, you will also
have
to declare them on a Canadian tax return, but you should be allowed to
subtract
the amount of US tax paid from any Canadian taxes due on that income.

Arthur Kamlet · Joined: 25 Aug 2007 Posts: 2053

In article ,
parrisbraeside@yahoo.ca wrote:
>
>The 401k withdrawal would not be part of the income which you could
>take the Foreign Income Exclusion since it is not Foreign Income.

And it is not foreign Earned income. The actual name is the
Foreign Earned Income Exclusion.

--

ArtKamlet at a o l dot c o m Columbus OH K2PZH

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