Foreign Employer Pension Lump Sum Payment

[qwerty678]

I lived in Canada for 2 years in 2015 and 2016 and contributed to my employers pension. I left Canada and moved to the US and am now a US tax resident (but not citizen). In the past 6 months I have been permitted to withdraw the full amount of my Canadian pension and have been sent a check for the full amount, less 25% Canadian taxes.

1) I believe I have to report this as income on my US tax return, but that I can claim a foreign tax credit for the 25% Canadian tax paid on it?

2) What is the process to report this?

3) They issued the check in December 2020 but I received it in early January and have not cashed it yet. Can I choose to declare this income either on my 2020 return or 2021? Or do I have to declare this in my 2020 return.

4) What currency exchange rate should I use? Can I use the average annual rate for the year I file in as listed here: https://www.irs.gov/individuals/international-taxpayers/yearly-average-currency-exchange-rates ?

[DaveF1006 · Accepted solution]

It depends. I shall address each question individually but I will explain the process in the very last point. 

1. You do need to report this as US income. You may claim the tax that was withheld as a foreign tax credit.
2. Since the check was issued in 2020, you will report this on your 2020 return even though you did not cash your check until 2021.
3. As a best practice, you should report the currency exchange rate on the the date the check was issued.

Here is how to report. You will report the income first and then claim your foreign tax credit.

1. Log in or open Turbo Tax.
2. Go to federal>income and expenses>retirement plans and social security>show more (if using Turbo Tax online)
3. Go to Canadian Registered pension and report it.

To claim the Foreign Tax Credit.

1. Log in or open Turbo Tax
2. Go to federal>deductions and credits>estimates and other taxes paid>show more (if using turbo tax online).
3. Select Foreign Tax Credit or Foreign Taxes (if using the software)
4. Answer the questions. Be sure when you get to the area where it says Gross income, list the full amount of the pension here or else you won't receive the credit. Many people make this mistake.
5. Also when the program asks for the category of income, indicate this is income resourced by treaty.
6. Sometimes this section gets a little confusing so if do have questions regarding navigation, just reach out to us. We are here to help.

[qwerty678]

Thanks. Very helpful. I actually requested a filing extension and so am filing this now.

1) I reported my Canadian Pension Amount in the way you suggested and my federal tax went up $3500 (seems about right for my tax bracket). 

2) I then went to the foreign tax credit section and followed your directions. I input the same gross amount as I entered in step 1 and then entered $3100 as the USD amount of tax that was withheld by Canada. However Turbotax is only giving me $1700 as a foreign tax credit instead of $3100. 

Why is only ~60% of the foreign tax withheld qualifying as a tax credit, when the US tax I owe on the gross amount is higher than what the Canadians withheld? Any advice appreciated.