US Expat in Canada - Best way to file taxes?

[clintjohnson]

Hello!

I’m a US expat in my 20s living in Canada - started my career here. Thus far, I’ve been filing my own taxes using TurboTax and use Foreign Earned Income Exclusion, which covers my earnings.

While I have a good sense about PFICs, FBAR and US-Canada tax treaty, I still sometimes am concerned that I might file incorrectly or am not managing my money in the most tax efficient way.

1) is TurboTax Deluxe sufficient for tax filing as an expat? Should I be considering other options or should I even be going to an expat tax service?

2) should I be filing for a foreign tax credit instead of foreign earned income exclusion? The one benefit I can think of is that I’d be able to contribute to a Roth IRA in a US investment accountZ

Any help would be appreciated! I also plan to do my own research to make informed decisions but hoping to get some alternative perspectives and experiences.

 

[angusargyle12]

@clintjohnson If you know the rules, TurboTax is fine. At least it has been for me as an expat in Germany. But it’s not going to go out of its way to help expats. You need to read the IRS guidance about things like the FBAR and FATCA because TT’s prompts for those are laughably inadequate.

The FEIE vs FTC is a tricky question. FEIE is easy, and if you value ease and your income isn’t above the upper limit, then it’s the way to go. However, if you do end up paying more in foreign taxes than you would in the US, the FTC has its advantages (like your IRA). Just be certain you want to deal with those extra filing steps, because declining the FEIE is a 5 year decision. Personally, I’ve always chosen the FEIE, but there are plenty who swear by the FTC.

 

[clintjohnson]

@angusargyle12 Thanks appreciate the insight!

 

[joryanne]

@angusargyle12 Huh? I thought your FTC must be lower than US taxes to use an IRA? For e.g, if you owe 3K in Fed taxes, FTC (2K) > Outstanding US tax balance (1K) > IRA contribution to reduce/clear outstanding portion (0)? Where did I misunderstand?

 

[angusargyle12]

@joryanne If I’m wrong I’m happy to change my mind, but I don’t see how it can be what you describe. The IRS says that you need taxable compensation, but it doesn’t mean that you have to owe tax to contribute to an IRA. So that means you can’t contribute to an IRA with income you exclude via the FEIE. But reducing your tax liability with the FTC is not excluding that income, it’s just using a credit against the owed tax.

Maybe you’re thinking of making the traditional IRA deduction, and that’s true. If you lower your tax to zero, then you can’t deduct in the traditional IRA contributions, and that negates it’s one big benefit.

 

[joryanne]

@angusargyle12 OK, so you were specifically referring to a nondeductible or Roth IRA abroad thru FTC? For context, I'm a US ex-pat in Canada where a Roth is no different from a taxable account. Due to a bad treaty, all of the div + cap gains in your Roth are taxed by Canada.

Only the Trad IRA provides tax benefits in Canada as (1) its contributions offset your US (but not Canadian) taxes and (2) the earnings are also tax-deferred in Canada. If a Roth is actually the "right" account for you based on current vs future income tax rate, what you could do is (1) make nondeductible IRA contributions, (2) flee Canada (end residency) and (3) backdoor Roth when back in the US. You need to do this fast or your earnings accumulated over the years will incur crazy taxes

Where do you live that recognizes the tax-free status of Roths? I'm jealous lol

 

[angusargyle12]

@joryanne Actually I wasn't. You could contribute to a traditional IRA even if you don't owe tax. There's just no immediate tax benefit. The benefit comes from it growing tax free. It's one reason I don't bother.

I live in Germany. The treaty is unclear about Roth's. From my reading, it sounds like it's treated as a pension plan but it receives no tax-deduction benefits in Germany (unlike, amazingly, a traditional IRA). Withdrawals would be taxed in Germany though not in the US.

EDIT: The main benefit I've read about using the FTC isn't the IRA but the accumulated tax credits over years of paying more tax abroad than in the US. When you return to the US, you can use that to offset your current US taxes.

 

[joryanne]

@angusargyle12

Actually I wasn't. You could contribute to a traditional IRA even if you don't owe tax. There's just no immediate tax benefit. The benefit comes from it growing tax free. It's one reason I don't bother.

OK, that makes your IRA contribution a nondeductible one, paving the way for an easy Backdoor Roth later (having a mix of deductible and nondeductible ctrbs complicate it). However, the more tax-efficient your investments (i.e., minimal dividends + not selling gains), the less an IRA's tax-deferred benefit matters, isn't it?

Withdrawals would be taxed in Germany though not in the US.

Only withdrawals? Still miles better than Canada where "A Roth IRA does not enjoy the income tax deferral benefits afforded under the Act to Canadian registered plans and traditional IRAs. As a result, the income accrued in a Roth IRA is generally taxable in Canada on a current, annual basis." Also, with higher taxes in Canada, there's no US tax left to deduct with an IRA ctrb. Hence why I said, to enjoy a Roth, you need to flee Canada and Backdoor Roth ASAP.

The main benefit I've read about using the FTC isn't the IRA but the accumulated tax credits over years of paying more tax abroad than in the US. When you return to the US, you can use that to offset your current US taxes.

Yep, up to 1 year backward and 10 years forward.

 

[angusargyle12]

@joryanne

However, the more tax-efficient your investments (i.e., minimal dividends + not selling gains), the less an IRA's tax-deferred benefit matters, isn't it?

You’re reading my mind here. It’s why I don’t buy dividend stocks or at the very least don’t favor dividend paying stocks. Dividends equal tax headaches. Selling stocks equals tax headchars.

 

[joryanne]

@angusargyle12 We can't avoid dividends as Americans though. All US-listed ETFs—which Americans are confined to or risk PFICs—must issue dividends by law, I believe?

What are these accumulative, non-dividend paying US ETFs that you speak of? Take my money! Lol

 

[angusargyle12]

@joryanne Not ETFs. Stocks. I buy stocks that don’t pay dividends. It’s easy to find them. Just buy them as a basket and never sell and hope that some of them become the historic winners that drive overall portfolio performance. Use fractional shares to buy each in identical sizes.

The good news is that this has beaten the market since 2009. The bad news is that it sometimes gets you in bubble stocks (2000 was bad for this strategy).

This is not advice. But it’s my personal theory on how to invest for my US expat situation.

 

[joryanne]

@angusargyle12 Personally, I find it a logistical nightmare to manage a basket of stocks that mirror broad market indices. VT, for e.g. has 8K+ stocks, and I need at least the top...200 stocks to mirror it? The mere thought of juggling 200 stocks makes me shudder. Wishing your strategy all the best though! It's too difficult for a novice like me xD

 

[reddog44]

@clintjohnson Not an expert. Actually a Canadian expat living in the states, prepping for an eventual return.

If you are making decent money or have assets you should be concerned about this. It's probably worth speaking to a cross border tax specialist about your concerns. A few hundred now might be worth a lot more down the road. Just my 2c... It's possible you are doing everything right, but the potential long term consequences for retirement and taxation could easily outweigh the cost of an initial consultation.

Of course I'd love to know what you learn.

 

[clintjohnson]

@reddog44 Appreciate it! Looking into cross border accountants now but taking some time to decide if I need to

 

[kiranchandra]

@clintjohnson Did you find anyone? I’m looking too

 

[resjudicata]

@clintjohnson Does the free version of TurboTax include form 2555? And when you file electronically, how do you specify the conversion factor?

 

[shifty2112]

@resjudicata Yes it’s included and you have to use the rate from year-end.

 

[oechikr]

@clintjohnson HR block has a diy service like TurboTax but it's made for expats. they can help you decide which to claim, the FTC or FEIE.

https://www.hrblock.com/expat-tax-preparation/resource-center/filing/status/taxes-for-expats/