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Which Tax Return to File First - U.S. or Local Country (U.K, Canada, etc.)?

Which Tax Return to File First - U.S. or Local Country (U.K, Canada, etc.)?
Ines Zemelman, EA
21 January 2019

Where does one begin?

As we all know by now, U.S. citizens and green card holders are required to file U.S. tax returns no matter where they live. Now, which return do you file first? It not matter which tax return is filed first - foreign country or U.S.

You can claim credit in either country, but a refund received in one country reduces your remaining credit pool in other country. For the remainder of the article, we will use Canada as an example (but you can insert any country and the answer will remain the same.)

For example - the less you pay in Canada one year, the more you pay in the US the following year.  If you had filed US return 2016 in 2017 before you filed your Canadian return, then the result would be the same.

In 2016 you received refund in Canada for tax paid in the US that fully offset Canadian taxes. Thus, this year, with the increased US income, we do not have any foreign tax paid during 2016 year to offset your US tax bill.

Cash versus Accrual Method of Filing


In this scenario, you have three options to eliminate double taxation, but this is a two-step process.

  Options 
  1. Tax that you pay this year in Canada will fully offset your 2017 US tax bill - this is one option.
  2. Other option is to file amended tax return in Canada and claim income tax paid in the US. Since you can take only $4K credit in Canada this year for US tax this may be a good option. After the refund you will have $6K tax paid in Canada to apply as a credit towards the 2017 tax return in the US.
  3. Third option - we can take credit in the US for tax paid in Canada now and eliminate the US tax bill. Net result will be the same. However, this would require switching to the so called "accrued tax" credit basis, i.e. you take credit in the US on tax that you did not pay yet but you owe.

This option would eliminate your current US tax bill. However, it has one drawback.

Once you switch to the accrual method you no longer can go back to the basis of tax actually paid. This election would be permanent. We can do that as long as you realize this is a permanent election.

 

Ines Zemelman, EA
founder of Taxes for Expats