Question

Hello,

I’m hoping someone can help me.

I’m a dual Canada/US citizen and I live in Toronto Ontario. I moved to Toronto 2 years ago (was in the US for 10 years) and started working (out of retirement) as a consultant for a sales firm full time. I also have pension income from a company I worked for while I lived in Canada from 1982 to 1993.

I’m doing my 2011 1040 return (I extended via form 4868) until October 15. My main income consists of $45,000 of Canadian pension income, $10,000 of Canadian investment income and $70,000 of consulting income (don’t have very many expenses). The total of my income exceeds the allowable deduction amounts for form 2555. I’m aware that the $10,000 of investment income will not quality for the deduction, however I was told that the pension income would qualify.

When I work through my US 1040 I still have an amount of US tax owing. I was told that if all my income was US source I would owe any tax.

Should I be paying tax in this case?

Hope you can help.

Regards

XXXXXX

Answer

Hi XXXX

Thanks for your email.

With regards to form 2555, only “earned income” qualifies as income that can be excluded by filing this form. Earned income generally relates to wages or self-employed earnings and pension income is not regarded as earned income. As a result, by filing form 2555, you will only be able to exclude you consulting income up to the maximum amount allowable.

Generally speaking, given that Canada has a higher tax rate than the US, since all of your income is Canadian source, you shouldn’t have any US tax after foreign tax credits (this may not be the case if you have significant deductions for RRSP’s or certain other deductions).

You may want to consider revoking your 2555 election and instead claiming all of your income on the US tax return. From there, after completing form 1116 to claim a foreign tax credit for your Canadian taxes, you are likely not to have any US tax owing.

It is also important to note that if your income is above the 2555 exclusion limit, the remaining income will be taxed starting at the tax bracket at which the remaining income would have been taxable had the 2555 not been filed. This is a potential cause of your current issue with having US tax owing.

Please give Tony Theaker a call if you would like to discuss this further.

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