I am thinking of moving to NY. Nearly all my income will come from Canada and will be taxed at a fixed rate of 25%. The tax credit for Canadian tax paid will much more than wipe out any US income tax owed. Can the excess be used as a credit against NY state and even city taxes?
Just for the record, I will say that in Canada, any unused foreign tax credit can be applied against provincial income taxes and I am wondering if the reverse situation works. I did look at NY tax forms but they are rather complicated and I am hoping someone will know off the top.
First thing is to see if NY state and city taxes are only on income earned in those jurisdictions.
I’m not a tax professional, but I’m British, and I resided in NY for many years with significant UK-sourced income for which I had to pay UK tax. So I faced a similar situation, and I had good accountants who specialized in ex-pat taxation, and I can tell you what happened on my returns.
I think the answer to your question is “no”, based on what happened on my returns over many years.
For federal tax, you have the “choice” of either claiming foreign tax paid as an itemized deduction on Sch A, or claiming it on form 1116. In general, you would always use 1116, because then you get (sooner or later) a 100% credit against federal tax, whereas via Sch A you would effectively only get a credit back of the foreign tax paid multiplied by your marginal federal tax rate. It sounds like you know this already, but there are arcane calculations of the amount of foreign tax credit that you can claim in this way via 1116 in a given year, based on the proportion of your total income that is deemed foreign source. Any unused credit carries back 1 year and forward 10 years.
So, I think your question is - if you filled out federal 1116, but you have been unable to use all of your foreign tax credit in a given year, rather than carry forward for next year’s federal, can you use it against current year NY state tax? The answer is no, based on what my accountants did on my returns. I think that if you had taken it as an itemized deduction for federal, then the same deduction might apply for NYS. But since taking it as a deduction doesn’t make sense for federal, it would not benefit you to do this.
You are liable for NYS and NYC tax for all (worldwide) income earned while resident in NYS and NYC. There are explicit residency tests, it’s common for high earners with multiple homes to keep careful track of nights spend in NYC.
Thanks Riemann. You have, unfortunately, answered my question. I was afraid of that. It significantly impacts on my chances of moving to NY, where my daughter lives. Every year, I dutifully fill out US tax returns and use 1116 to reduce my US tax to 0. In fact, I just did it and my imputed US tax is only about half of my Canadian taxes paid, so I know the drill. As I said, under Canadian law, unused portions of foreign tax credit can be used against provincial taxes.
One thing I could do is move all my investments to the US where they would not be taxed in Canada, but it remains that the major part of my income is my pension, which cannot be moved.
Pensions are a special case under tax treaties, were you aware of this?
If you were from the UK you would not have this problem at all, under the US-UK tax treaty (2001, Article 17) pension income is taxable only in the country of residence.
Unfortunately the US-Canada tax treaty is different, but on a quick look it says that you should be paying a maximum of 15% tax in Canada, then the usual rate for income on your U.S. tax return. So you would have only 15% to reclaim as foreign tax credit on form 1116. (Am I missing that there’s an additional 10% Canadian provincial tax perhaps?)
U.S. Canada tax treaty info:
https://www.irs.gov/businesses/international-businesses/canada-tax-treaty-documents
https://www.irs.gov/pub/irs-trty/canada.pdf - see Art XVIII for pensions
and plain English guidance here:
https://www.irs.gov/pub/irs-pdf/p597.pdf - see p3 re pensions
Thanks Riemann. I will look into those treaties. Until I retired nearly all my income was free of US tax on the basis of the earned income exclusion, but that doesn’t exclude pensions. Then I retired and started filing 1116 forms.
The 25% was based mainly on hearsay. I have always done my own taxes, so I am trying to find out what I am in for. I am waiting till after the election to decide in any case.