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I'm about to file my U.S. tax return for 2017. In August of 2017, I moved to Canada from the U.S. for graduate school (I am a U.S. citizen). I was on a vacation during April 15th, 2018 and quickly googled to see that if you live outside of the U.S. on April 15th, 2018 you automatically qualify for a two-month extension of your taxes. I later am reading that I still will need to pay interest on what I owe (I did not expect to owe anything, based on previous returns, see below).

I have not yet filed my Canadian taxes, which are past due, due to the CRA not accepting my netfile, but will do so soon when I have the time to wait on the government phone line during my normal work hours. The CRA owes me about $70 CAD so there is no rush in filing the return.

My big question is as follows. I am filing as a Canadian Resident for tax purposes; however, I still need to report my worldwide income to the IRS. Due to tax treaties, I will not be double-taxed on this earning. However, my income in Canada was largely from an untaxed scholarship and TA earnings that were low enough to not be liable for federal income tax. So my turbotax return in the U.S. is happily claiming I never paid any tax on my Canadian earnings and causing about an additional $1000 of tax liability in the U.S.

This seems bizarre. I do not qualify to exempt the income because I just moved to Canada. Yet, if I had been living there either as a bona fide resident or was physically present for 330 days I would not have the additional $1000 of tax liability. For example, in 2018 I would likely qualify (though this is up for debate as I am currently in the U.S. on a summer internship).

Am I missing something important? This mid-calendar-year move seems to have a pretty bad side effect for me.

  • The FEIE permits you to have any 330 days within 12 months for the physical presence test, but that need not coincide with the tax year. The middle of the tax year move is thus not necessarily an issue, but the fact that you’re in the US on an internship right now suggests that you’ll be there for more than 35 days, which means that you probably won’t qualify for the physical presence test if measured from Aug 2017 onward. (I think you’d have otherwise qualified by this July, if you had accrued 330 days outside of the US.) See also IRS pub 54. – Scott Dudley Jun 15 '18 at 13:55
  • It seems like your citizenship status would likely be a relevant piece of information. – Acccumulation Jun 15 '18 at 15:26
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Per this answer, unless you can get a W2 for the scholarship, the IRS seems to regard the scholarship as unearned income. This would mean that Form 2555 is irrelevant for this scholarship, regardless of the bona fide residence test or physical presence test :-( Starting next year, you'll likely be able to use 2555EZ, but only to exclude your TA earnings, not the scholarship.

The United States-Canada Income Tax Convention doesn't look like it will help you, either. Article XX addresses students, but essentially says that if you've moved to Canada to pursue your education but intend to go back to the US afterwards, then: while you're in Canada, you're exempt from Canadian taxes on income that you receive for the purposes of your education, so long as that income originates from outside Canada.

Like for many US expats, it seems you're SOL and essentially penalized for being an American in this case. TLDR: failing to qualify for the FEIE may not have had a serious negative side effect, depending on the size of your TA earnings in comparison to your scholarship, since the FEIE may not help you much in the future either even when you do qualify for it.

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