We cashed out RRSP's from Canada in 2020 and again in 2021 (an RRSP is the Canadian version of 401K / IRA). I always thought there was a tax treaty between the 2 nations, so that you would not have to pay double taxation for income earned in the other country.
The taxes paid in Canada on the RRSP default to 25%. In 2020, the US tax credit allowed us to only apply less than a 1/3 of the taxes paid in Canada, so the balance of the RRSP was subject to US taxation. This year, the IRS has allowed about 1/2 of the taxes paid to count as a credit, so I'm confused by the tax treaty and double taxation; it seems (to me at least) this is a myth and I am subject to a lot of double taxation.
I'm wondering if my situation sounds correct - even though I've paid taxes in Canada, does the IRS only allow a share of those foreign taxes to count as a credit towards our US return? If I can't use all my foreign taxes credits when the income is subject to US taxes, is there ever any situation where I can use those left over tax credits, or will they just expire after 10 years?
When preparing my taxes, Turbo Tax asked if I want to apply any left over credits from prior years. If I can't apply all of the current year credits, is it of any benefit to try to apply prior year credits? And if I do include them, is that when the clock starts towards the 10 year window or will they expire in 2030 regardless?
Any feedback is appreciated.
