Most people think the foreign tax credit only reduces their federal taxes. But in some cases, it can also reduce your state tax bill—and we recently helped a client cut his North Carolina taxes by $6,650 because of it. If you’ve ever lived or worked in Canada and now file in the U.S., this is one of the most commonly missed tax opportunities we see.
In this video, I cover:
– How the foreign tax credit actually works
– Why it’s often missed at the state level
– A real client example that saved $6,650
– When this applies (and when it doesn’t)
– Which states may allow this strategy
This is especially relevant if you:
– Lived or worked in Canada and now file in the U.S.
– Have Canadian income (RRSPs, pensions, etc.)
– Recently moved to the U.S.
– Want to avoid double taxation
This isn’t an aggressive tax strategy. It’s simply applying existing tax rules correctly—but across both federal and state systems. And it’s something we see missed all the time.
Watch the video:
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Summary
Quick recap
Bryan discussed a tax strategy for Canadians living in the United States that can help reduce state tax liability beyond just federal tax benefits. He explained how the foreign tax credit, which typically reduces federal taxes, can also apply to state taxes in certain U.S. jurisdictions, using a specific example of helping a client in North Carolina save $6,650 through proper application of this credit. Bryan noted that many accountants and tax software programs, including TurboTax, often miss these state-level foreign tax credit opportunities due to complex questioning and requirements, particularly when dealing with Canadian retirement account withdrawals. He emphasized that Canadians living in states with income taxes should verify if their state allows foreign tax credits and ensure proper application to avoid double taxation.
Summary
Foreign Tax Credit Strategy
Bryan explained that the foreign tax credit can help reduce state taxes, not just federal taxes, sharing an example of helping a client reduce their North Carolina state tax bill by $6,650. He emphasized that this strategy is often overlooked by other accountants and could benefit people who have lived and worked in both the US and Canada but now file US taxes.
Canadian Retirement Account Tax Planning
Bryan explained how Canadian residents living in the U.S. face tax complications when withdrawing from Canadian retirement accounts like RRSP, LIRA, or RRIF. He noted that while Canada withholds taxes on these withdrawals, this amount can be claimed as a foreign tax credit on both federal and, in some cases, state U.S. taxes to prevent double taxation. Bryan emphasized that this is often an overlooked planning opportunity and highlighted that state-level foreign tax credits can provide additional tax savings depending on the specific state.
Foreign Tax Credit Planning Review
Bryan shared an example of tax planning where a client had taken a large RRSP withdrawal of nearly $200,000 in 2025 to maximize foreign tax credit and minimize federal tax liability. During the review, they discovered that while the federal return was correctly processed, the North Carolina state return had missed applying the foreign tax credit, resulting in an $7,500 obligation. Bryan explained that they were able to file an amended return using TurboTax, which transformed the $7,500 obligation into a $6,550 refund for the client.
Foreign Tax Credit Application Process
Bryan explained that foreign tax credits are often missed due to CPAs’ limited expertise in state taxes and the complexity of applying these credits on platforms like TurboTax. He noted that TurboTax’s interface requires users to answer certain questions affirmatively to access the correct forms for claiming foreign tax credits on state taxes. In one specific case, the process involved indicating taxes paid to a different state before including foreign government taxes, which allowed the credit to be applied to North Carolina state taxes.
TurboTax Tax Simplification Limitations
Bryan discussed how TurboTax, while convenient, can oversimplify tax questions and potentially miss important details like foreign federal tax credits or state tax credits. He explained that this issue is particularly relevant for individuals living in states with income tax who are taking withdrawals from Canadian RSP, RRIF, LIRA, or LIF accounts.
Foreign Tax Credit Guidelines
Bryan discussed the importance of checking with one’s state to see if they allow foreign tax credits against state income and ensuring proper application. He emphasized that not taking advantage of these credits could result in missed opportunities for tax savings, particularly for clients with large RSP withdrawals. Bryan clarified that while they provide tax planning advice, they do not prepare taxes for clients and are not attempting to circumvent any rules.
Cross-Border Tax Planning Strategies
Bryan discussed the complexity of tax planning for Canadians living in the United States, highlighting the challenges of managing both Canadian and U.S. retirement accounts and benefits. He explained that Retirement Financial can help with developing cross-border tax strategies and retirement income plans. Bryan encouraged listeners to schedule a complimentary consultation with an experienced cross-border financial advisor to address their specific needs.