Unable to claim foreign tax credit on Canadian Locked in RRSP withdrawal- Please guide me

[umadevi19]

Hi

To meet emergency needs I had to close my Canadian locked in RRSP and took the distribution.

Once I enter the total distribution, the taxes owed shoot up to the sky and I am unable to figure out how to include the taxes withheld at Source by Canada in my tax returns to reduce the tax liability. I played around with form 1116 to avoid double taxation but cannot figure it out.  Should I deduct taxes paid on schedule A and if so, how?

Here are some details. (All are in US$)

Canadian Registered locked in RRSP 

Total distribution: $ 75000

Taxable part of distribution: 56250

Taxes held back @25% = 18750

 Can anyone on the community help me out?

Thank you in advance.

[RalphH1]

Taxes withheld by foreign governments on your source income there are normally paid to their treasury, so we don’t want to ask the IRS to refund the $18,750! (You may be able to get part of it back from Canada, but that’s a little out of my area. I do need to add that any refunds at this point would of course reduce the foreign tax paid amount for our purposes here.)

The Foreign Tax Deduction is often limited, as “itemized deductions” in general are, so the Foreign Tax Credit (which I understand you’re not a big fan of so far) is probably the way to go. (Here’s a TurboTax article on both of those.)

Umadevi, there are many little areas in the credit interface where things can get tricky, and I can’t tell, from what you wrote, exactly where you’re having trouble. Some customers like to get a call from us (here’s how) in cases like this, which of course allows for a more thorough back-and-forth clarification.

But you can certainly re-post here, with additional details about screens you don’t understand, things the program is telling you that aren’t what you expected, etc. And I or someone else can help you figure it out!

[umadevi19]

Hi Ralph

Thank you so much for your response and is deeply appreciated.

Here are some aspects.

1. Canada and USA have income tax agreements to prevent dual taxation.

2. I have no issues in paying the taxes on the income which originated out of my RRSP.

3. For practical purposes if I report my additional income as $75000 which is the total distribution and since I already paid $18750 to Candian govt. How do I show this amount to offset my total taxes owed to IRS. I am unable to offset the taxes already paid to Canadian Govt. using form 1116.

4. There was flag which came up while using form 1116 in TurboTax which I am indicating below, and I have no clue what it is all about, (This may be due my playing around with form in Turbo Tax)

High Tax Kickout Income

In some cases, passive income and taxes must be treated as non-passive category income and taxes. Generally, passive income and taxes must be treated as another category of income if the foreign taxes you paid on the income (after allocation of expenses) exceed the highest U.S. tax that can be imposed on the income. (Currently the highest U.S. tax rate is 37%.) In most cases, the reclassified income will be treated as general category income.

See Publication 514 and Regulations section 1.904-4(c) for more information.

Thanks

[RalphH1]

The tax treaties can get very complicated, but I think we’re on the right track with this straightforward treatment of an RRSP distribution to a U.S. resident. (I am definitely wondering if you can get some of your 25% withholding back from them, which would change the numbers being entered on the U.S. return. But I’m also required to avoid interpreting the Canadian tax code…)

It’s the Foreign Tax Credit which will (approximately) prevent dual-taxation, and obviously something isn’t yet configured how we want it. I recommend going back to the “Country Summary” screen and deleting the country, then re-entering it and stopping on any screens you’re not sure about, to post your concerns here. (It might be another agent who comes by to help you next, depending on everyone’s schedules. But I’ll be keeping an eye on this.)

Or you could take this opportunity to go back and tell the program you’re doing the deduction instead, just to see the result. (Are you otherwise itemizing? If so, it’s more likely that the deduction will be comparable to the credit.) You could then either stick with that approach, or make a note about it and resume getting the credit to work (and ultimately compare the two).

Also, umadevi19, I know I brought this up already, but this would be a great time to have us call you!