I tried filing tax as non resident in taxact for 2021 as i was in US only for 1 day in 2021 so i am non resident alien as per substantial presence test.
But to my surprise taxact is asking for a huge taxes to be paid as non resident even when my employer already deducted federal tax, social security tax, medicare tax and state tax in each paycheck…
looks like social security tax, medicare tax is not counted as tax by taxact for NR so it is asking huge federal tax to pay as no standard deduction or itemized deduction apply here as NR
For state tax, it is refunding about 15% of the taxes… i thought it would refund 100% state as didn’t live there…
Also, hsa contribution, medical premium and any 401k contribution seem to be calculated for tax as well so it was waste to put in hsa and to pay medical for 2021 if i have to still pay tax on that amount
…
Can you suggest if all this looks correct?
or Should i try any other tool or agent to file US tax as non resident ?
Jai Shri Ram, I don’t really have an expertise in this matter but it does seem odd as to why you would have a significant amount of tax withheld if you were in USA for only 1 day.
Did you tell your employer after you moved out of America or did they assume that you were a US resident and continued to withhold and remit State taxes after you were no longer a resident. The thing with most states I’m guessing is that they only expect payroll taxes to be remitted, there is no refund for not being a resident. There are Dual Taxation avoidance treaties between states like NY and NJ so you don’t get an unfair tax treatment but afaik there are none with individual states and foreign countries.
It’s definitely worth discussing with a tax professional.
However overall this should resolve in a tax neutral situation for you when you file your Canadian taxes (assuming you had an adequate tax liability in Canada), you should report all the income in your Canadian Tax return as well as claim a tax credit for whatever State and US Federal tax that was deducted (and whatever you pay in addition to what was deducted). So you’ll just end up getting a bigger refund from the CRA. Do keep your US tax statements and proof of additional payment handy as CRA may very well ask you for them during a review of your tax return or an audit (They did a review of my Foreign income and Tax credits and after I shared the US documents they did a minor adjustment due to which I had to return a couple of hundred dollars of the refund back. I think they said that the 401k contributions should also be added to the income whereas the US Tax return doesn’t add them up as income)
Great points, Panditji. To be safe, I would request the Federal tax return transcripts from IRS and keep them handy. I’ve had to submit them for the past 2 years to CRA, only then did CRA approve any credit I claimed for income tax withheld in the US.
Thanks for detailed info…
While filing as NR in taxact, during the state tax it asks this:
Were you a full-year resident, part-year resident or nonresident for the year 2021?
I selected obviously nonresident as answer to this.
then it asked:
Enter your state or country of residence during the period non-residence.
State of residency
Country of residency
For state i selected “none selected” as only US states are there.
For country, i selected Canada.
Now below is where i need the help with this:
As a Part-Year or Nonresident of Statename you can apportion your Statename tax by the percentage of your total income that is assignable to statename.
### Wages, salaries, tips, and other compensation
It shows total wages here taken from W2. It asks here to assign portion of total income to the state.
So my question is:
Should I assign 0 income to state here as i was non-resident of state for entire year?
But my payslips had address of this state. If i put 0 then it is refunding me full state tax which withheld/deducted from payslips. This is good as anyhow i will be paying state tax to Canadian state with my Canada tax return.
Should I assign full amount to state?
If i do this then it is refunding about 800+ amount from state tax and keeping other about 4800-5000 as paid to state… So when i file canadian tax return then i can claim it as foriegn tax credit probably…
Jai Shri Ram @srhere
I’m not sure about these specific questions.
I think the main discrepancy in your case is that your tax slips have your US address on them, presumably because your employer didn’t update it correctly or you didn’t tell them. Depending on what state this is, it’s best to consult with someone with more of an expertise than I.
If I was filling this form, I would assign the full amount to the state (assuming that aligns with your tax documents) and then claim a foreign tax credit with the Canadian tax return. But if the CRA looks closer at this and asks you why you paid state tax when you were a Canadian resident (and tax resident), that I’m not sure how to resolve (it’s unlikely that they’ll comb in so deep so you should most likely be fine).
Thanks for your advice earlier on about moving funds from 401K to RRSP. I’m filing my taxes for US and using TaxAct to file my 1040NR. I got a 1042-S from Fidelity and after I fill in those details in TaxAct, it says that I’ll be getting all of the 30% withheld amount returned to me. What is even more surprising is that, TaxAct is not accounting for the 401K 10% early withdrawal fee. Any idea what I could be doing wrong?
Background:
I moved from US to Canada in 2019 and made the 401K withdrawal in 2021. I didn’t have any other income in the US to report apart from the early withdrawal.
Thanks for the great post. I have a couple of follow up questions:
How were you able to have enough adequate Canadian tax liability to offset the US tax liability and the early withdrawal penalty? Is it because you moved to Canada very early in the year and had high enough Canadian income, so owed enough in Canadian taxes to offset both the US tax and 10% early withdrawal penalty?
Do you know if this 401K → RRSP move has to be done within a certain amount of time of moving to Canada? I am just wondering if this process could be done 2-3 years after moving to Canada (assuming that the US broker allows a Canadian address on the account, like I think Fidelity does)
Yeah, I had enough tax liability in Canada to offset the tax withholding and penalty on the American side. I moved in Nov 2019, hand the full year of employment and income in 2020 in Canada which is when I did the transfer.
There’s no fixed time as to when you can do this transfer, the only stipulation is that it needs to be done as a lumpsum transfer and not in parts.
You could do it the year you move or 10 years down the line.
Hi @sysout , I’m in a similar situation as yours. I’m filing taxes with a tax consultant and I’m seeing a refund for the full 30% withheld amount and no 10% penalty tax. I’m not sure if the tax consultant is doing it correctly. Was wondering if you did receive a full 30% refund. Any guidance you can provide will be super helpful. Thank you!
@panditji, I see you were super helpful with your responses to this thread. I’m hoping you can shed some light on my case. I transferred 401K funds to IRA and then withdrew all the funds and moved to RRSP in 2021. However, I could only deposit the net amount (after-tax 30% withholding and before 10% penality) converted to CAD to my RRSP account. I couldn’t top up the difference with my personal funds.
I would like to walk through how the tax filing is being done with some hypothetical numbers Assumptions:
Gross IRA amount (before 30% tax withholding) = CAD $150,000
Personal Income from T4 = CAD $120,000
I reached out to a tax consultant in Ontario to do both US and Canadian taxes. I’m reviewing the Canadian taxes (T1) and I have some questions about how the taxes are being filed.
Under Step 2 - Total Income section, the gross IRA amount converted to CAD is being reported under “Other pensions and superannuation - Line 11500”, which is $150,000. This is being added to my personal income which makes total taxable income as $170,000 I think this is correct
The same gross IRA amount is being reported under Step 4 - Taxable Income “Additional deductions (specify): Lump sum payment (60(J))”, which is $150,000. I’m not sure if this is correct. I thought this should be reported as $105,000 (30% less $150,000). But the $150,000 is being offset as deductions, so the total taxable amount comes to $120,000
Under Part C - Net Federal Tax, Federal foreign tax credit (complete Form T2209) is left blank. I thought this should be a calculated value. But I’m not sure if this is left blank because the amount of $150,000 is reported as lump sump payment 60(j)?
Based on the total taxable income, I’m just sharing how the Federal and Provincial taxes are coming out
Net Federal Tax after all non-refundable tax credits = $20,000
Net Provincial Tax = $10,000
Total Tax Owing = $30,000
Total Income Tax already deducted based on T4 = $25,000
Balance tax owing = $5000
I always thought the foreign tax credits should be calculated that could potentially offset 30% withholding tax. I’m not sure if the tax consultant is doing this correctly.
I’m hoping the information I provided is helpful to understand my use case. Any advice you can share would be helpful. Thank you!
You’re missing the details of the US tax return here. Whatever tax you paid there the 30% withholding + 10% penalty (assuming that was applicable) can be claimed on your Canadian tax return in the Foreign Tax Credit column.
That should wipe off the balance tax owing and get you a refund from the CRA.
As for what amount you report as income, this too should match up with the US tax return, you will need to declare the entire withdrawal (not minus 30%) as foreign income on the Canadian tax return but you will only get to deduct what you put into your RRSP so that’s not ideal tax wise but it is what it is.
Thank you for your response @panditji . For the US tax return, I only got a 1042-S slip, not a 1099-R. On the 1042-S slip, box 7a Federal Tax Withheld shows the 30% withholding amount. So when filing a US tax return, the tax consultant is saying there is nothing additional I owe in US taxes. In fact, I’m actually getting a full 30% refund which I’m not sure if that’s correct. I see @sysout posting something similar on this thread.
Where are you getting the 30% taxes withheld as the refund?
Is your accountant saying that the IRS will refund you the 30% as a part of filing the US 1040NR? If so, then that’s great and that’s exactly what you want isn’t it?
In that case, this makes sense to me i.e. IRS refunding you the taxes withheld and there being no foreign tax credit on the CDN tax return.
My understanding however was that the IRS wouldn’t refund you the 30% tax withheld because as a non resident your US sourced income is subject to a 30% tax rate (actually 15% for Canadian residents) and the amount that they don’t refund, you ask the CRA for a credit. Ask your accountant to explain the details to you but as long as the effective operation is tax neutral I think you are fine. One of the benefits of going with a professional in a situation like this is that they are liable to file things correctly and should be able to represent you in case of a review/audit.
@panditji just to clarify on your note about “actually 15% for Canadian residents”, are you referring to the tax treaty where the tax rate should be 15%?
I actually was taxed at 30% on withdrawal, so does it mean I can expect a 15% as a refund on the US tax returns?
Could you also share if the lump sum amount on Candian Tax form T1 was reported on line 20800 or 25600?
@rajman I spoke to a Tax specialist from TaxAct.com and he suggested that I fill a 1099-R manually with the relevant details from my 1042-S. Following are the steps I followed while filing my US tax returns using TaxAct.com
Filled 1042-S with all the information (income, withholding etc)
Filled 1099-R manually even though I didn’t receive one. On the 1099-R I only entered the income boxes and left out the withholding boxes because my withholding information was already covered from filling 1042-S
Filled 5329 - I think this is required for early 401K distributions that account for the 10% penalty
Note:
I moved from US to Canada in 2019 and withdrew my 401K in 2021. So I hadn’t filed any US tax returns in 2020 and for 2021 the only US related income was from my early 401K distribution. During my 401K withdrawal, 30% amount was withheld as federal taxes. I wasn’t expecting anything back from those 30% withheld amount and was expecting to pay 10% as penalty. But, since my 401K withdrawal was my only income for US, I ended up in a lower tax bracket and my effective tax rate was approx 12%. Add to that the 10% penalty for early withdrawal meant that I owed IRS only ~22%. So I ended up getting approx 8% back from the withheld 30%
Hope this helps!
Reference links from TaxAct:
The instructions from the 1st link mentions that you should fill a 1099-MISC for your 1042-S, but I confirmed with the Tax specialist from TaxAct.com that we have to fill a 1099-R and NOT 1099-MISC. 1099-MISC is for income from self-employment or contractors I think.
Disclaimer:
I am not a tax consultant or an expert. I’m just sharing my experience based on my own understanding. You should do your own research and consult a tax specialist for accurate advice.