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Passive income is earnings from dividends, interest, royalties, rents, annuities, etc., in which the taxpayer is not actively involved.
A pension is not passive income. See Topic No. 425 Passive Activities – Losses and Credits - IRS.
Let me provide all the steps necessary to enter a foreign pension and credit for tax paid.
To enter your foreign pension in TurboTax online program, you will need to create a substitute form 1099-R.
As to the Federal ID, if your foreign issuer does not have the ID number, try entering ones.
Since you also paid Foreign Tax on that income, please see the following steps from @TurboTaxKarenJ:
To report the foreign tax paid on your pension for foreign tax credit:
I am genuinely grateful to see such strong participation from Intuit employees to help clients with a complex subject. Thank you for that. Unfortunately the experts here, along with others on similar TT Community Q&A threads, differ in ways that affect how the reporting should be done: gross income vs net of taxes; passive vs general income on the 1116; 1099-R substitute or not; etc. Would it be possible to reach a consensus so there isn't a wide variety of methods in what the IRS receives, as well as reducing client exposure to errors the IRS would catch?
Note that the TurboTax "interview" process has a line for Canadian plans under the Retirement section of Wages & Income. Therefore, I reported my RRSP income this way (gross amount because it is all taxable, converted to USD using the exchange rate that was applied to the net amount I actually received). Then I let TT handle it. The income appeared on line 5a of the 1040, as expected; if it hadn't, TT - and perhaps the IRS - would get hung up on the lack of a valid TIN, which few foreign payors have. ("Try entering ones" seems a bit dodgy since it isn't true, which makes the final 1040 signature declaration perjurious.) After that, I followed the instructions for doing the 1116. For whatever it's worth, most cross-border accountants who have posted on the subject say to categorize it as Passive Income, but a few do say General Income instead.
Re IRS Topic 425, linked above: it seems to pertain to rental and real estate activities, so I'm not clear on its applicability here. I would like to note, though, that many RRSP/RRIF holders living in the U.S. cannot make any modifications to their investments due to SEC broker-licensing restrictions. Some waivers have been granted but they don't cover everyone. For those of us affected this way, the only "active and material participation" consists of initiating a withdrawal - and even that isn't an active choice with a RRIF.
I am so confused.
@Cutesy Can you please clarify your situation or help needed?
Reading through this thread is confusing to me. The last person's message about being consistent on the solution went unanswered. Perhaps I should just go with the "best answer" vote?
My situation is the same. 2023 is the first year I withdrew from my RRSP.
The program has a section for Canadian retirement plans, you can just follow these steps. It is just a few steps and you can always check back with any further questions.
I see the best answer leads to another best answer with another option. Your best option for an RRSP withdrawal is to report the full amount as taxable income and report the tax paid all on the same form. This way when the governments are sharing information, items will match up.
Hi. Appreciate the advice of engineering a 1099-R. The tax withheld at 30% offset the additional income. My only concern was that it said I may have an early withdrawal penalty of 15%. I know US plans have early withdrawal penalty. Any idea why this warning was triggered ? The penalty was not imposed on my federal return.
This warning was for informational purposes only alerting you to the fact that you may have an early withdrawal penalty. If the penalty was not imposed, then you can ignore this warning.
Thanks a lot for all the answers by experts!
However I am still very confused as there seem a number of answers to me, and hard to follow which one.
I withdrew all my RRSP money in 2023, e.g. total balance is $100K, Canada took $25K as tax, i.e. I got $75K.
Is below the complete procedure at TurboTax to deal with the tax on US?
1). Under "Wages & Income", enter $100K as "Total Distribution", and $75K as "Taxable part of Distribution"
2). Under "Deduction & Credits", follow below steps to claim the $25K as foreign tax credit:
"
i.s. I need to do both 1) and 2) ?
Thanks!
Almost perfect. You were given two methods of reporting and combined them so instead we need to pick one best method.
1. Report the income:
2. Report the foreign tax paid for credit against the taxes due. Your steps look good.
Since you paid $25,000 tax for a $100,000 distribution, I would suspect the $100,000 is the taxable amount otherwise you would have said, I withdrew $100,000 and had $25,000 tax withheld for the $75,000 Canada taxable portion.
Reference:
Note that if the amounts you mention were in Canadian dollars, you'll need to convert to US$ to report them on your 1040 and 1116. Derive the exchange rate in effect at the time of receipt by using the CA dollar amount transmitted and the US dollar amount that was credited to your US bank account. Technically you should do that with the amount received *before* the banks' wire fees were deducted from it, but with numbers this large, the wire fee (~$16 for my bank) is too small to make a difference.
Unless there was something extremely unusual about your RRSP, it's a tax-deferred plan roughly analogous to a US 401(k), and withdrawals are fully taxable. Any amount withdrawn from it and taxed by Canada is also taxed by the US, so this means that *all* of the withdrawal from your RRSP is taxable income and must be reported in the US too. The IRS sorts out the foreign tax payment separately. So convert the full amount to US$, using the rate determined as described above, and report that. You could edit the 1040 form directly to put it in line 5b (5a too if you want, although it's superfluous), but it would be better to use the TT walk-through questions. There is actually a section specifically for RRSP withdrawals which I think is described earlier in this discussion. It covers more than just what goes into the income section.
Note that the flat 25% tax withholding is what Canada requires from non-residents who have RRSPs. Non-residents with only this type of Canadian income do not file a Canadian tax return, so there's nothing to match in that respect. In your case CA$25K is the foreign tax withheld; convert it to US$ the same way as above for reporting it to the IRS. When claiming a foreign tax credit (Form 1116), note that the IRS will only credit you the amount of tax you would have had to pay if it had been US income; this is called proportional taxation. The dialogs/forms calculate the fraction of your total income that was from (any) foreign sources, apply that fraction to the total tax that would be due if it were all simple US income, and then use the result as the limit on your foreign tax credit. If, like the vast majority of US filers, you pay less than 25% tax on your income, you will not get a credit for all of it. C'est la vie.
Other notes: you should receive a 2023 NR-4 from the Canadian firm that was the RRSP custodian. In principle they have until the end of March to issue it; we received both of ours before mid-February. Also, since the value of your RRSP was >US$10,000, I hope you have been reporting its existence each year to the US Treasury using the online FBAR. It should also have been reported on Form 8938 (sections II, III, and VI) with your tax returns once the RRSP value hit the threshold (different than FBAR's). If you haven't been, that's a totally separate issue and there are resources to find out how to rectify it now. Both of those are also used to report that it was closed during the tax year.
Yes, you would report the income on your return and file to receive a foreign tax credit for the taxes you paid to Canada. To report the RRSP, go to:
To claim the Foreign Tax Credit.
NM1:
I believe this is the best answer yet. Previous answers on this thread were misleading; I wonder if those can be deleted so as not to be confusing for us?
Well, thank you, but I certainly wouldn't say my reply is the be-all and end-all, at all. 😉 There have been quite a few others who provided helpful instructions, like how to walk through TurboTax to do this reporting, among other things. It can be tricky to find the right sections in TT because sometimes the difference between choices is subtly worded. Most of the erroneous advice I've seen here had to do with whether you should report the full amount withdrawn from an RRSP, or the net received after Canadian taxes, and entering the net amount is not correct. The other major disagreement seems to be whether it's considered Passive or General income on the 1116, and since I've found each advised by various professional preparers elsewhere, I'd say to let TT decide that.
Thanks a lot for your response and all the responses!
Hey, NM1:
No, I never filed Form 8938, would you please provide instructions on how to fill Form 8938 in TurboTax ?
Also from what I know of, "reporting its existence(RRSP) each year to the US Treasury" was canceled and removed a few years ago, not the case?
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