International in Taxable - Advantage?

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Saving$
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International in Taxable - Advantage?

Post by Saving$ »

According to the Wiki, http://www.bogleheads.org/wiki/Principl ... _placement
all other things being equal, if you can put your international allocation in taxable, there is a slight advantage.

I get that if you have millions even a slight advantage makes a difference. But if you are an average investor, how much of an advantage is it really? And is the advantage worth the (presumably) extra complication on the tax return?

I estimated that FSGDX pays a taxable dividend of about 1.8% annually. Not sure if these would be considered qualified or non qualified, but for worst case scenario, assume non qualified. Thus, for:
$1k invested, you would get $18 in taxable dividends. If you are in the 28% bracket, this equates to $5.04 in taxes.
$100k invested, you would get $1800 in taxable dividends. If you are in the 28% bracket, this equates to $504.00 in taxes.

So how much would the foreign tax credit impact the above? If you had $100k and got a credit for the entire $504, I can see how this might be worth it. But not really worth it for $5.04 savings...
livesoft
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Re: International in Taxable - Advantage?

Post by livesoft »

Not much at all with info from 2013. It will also depend on your marginal income tax bracket.

Here's a post on that:

http://www.bogleheads.org/forum/viewtop ... 1&t=129164
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grabiner
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Re: International in Taxable - Advantage?

Post by grabiner »

Saving$ wrote:According to the Wiki, http://www.bogleheads.org/wiki/Principl ... _placement
all other things being equal, if you can put your international allocation in taxable, there is a slight advantage.

I get that if you have millions even a slight advantage makes a difference. But if you are an average investor, how much of an advantage is it really? And is the advantage worth the (presumably) extra complication on the tax return?
The estimates in that wiki page give an advantage of ten basis points for Total International over Total Stock Market in a 25% tax bracket, assuming both funds have a 2% yield before foreign taxes are taken out. That's $50 a year on a $50K investment.

One of the underlying assumptions has not been true in recent years; international stock yields are higher than US yields, and thus the tax costs are close to equal.
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leonard
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Re: International in Taxable - Advantage?

Post by leonard »

Saving$ wrote:According to the Wiki, http://www.bogleheads.org/wiki/Principl ... _placement
all other things being equal, if you can put your international allocation in taxable, there is a slight advantage.

I get that if you have millions even a slight advantage makes a difference. But if you are an average investor, how much of an advantage is it really? And is the advantage worth the (presumably) extra complication on the tax return?

I estimated that FSGDX pays a taxable dividend of about 1.8% annually. Not sure if these would be considered qualified or non qualified, but for worst case scenario, assume non qualified. Thus, for:
$1k invested, you would get $18 in taxable dividends. If you are in the 28% bracket, this equates to $5.04 in taxes.
$100k invested, you would get $1800 in taxable dividends. If you are in the 28% bracket, this equates to $504.00 in taxes.

So how much would the foreign tax credit impact the above? If you had $100k and got a credit for the entire $504, I can see how this might be worth it. But not really worth it for $5.04 savings...
But, small balances become big balances. And, once you have equities in taxable in can be hard to switch due to embedded capital gains.

So, assuming you want to have "big" balances in the future, you need to set it up right from the beginning. That means planning for the future - and putting the Int'l equities in taxable where it makes sense.
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zzcooper123
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Re: International in Taxable - Advantage?

Post by zzcooper123 »

Aren't foreign dividends taxed at the full rate? Only domestic stock dividends receive preferred rates. To me, this seems like a big deal in large taxable funds .
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Phineas J. Whoopee
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Re: International in Taxable - Advantage?

Post by Phineas J. Whoopee »

zzcooper123 wrote:Aren't foreign dividends taxed at the full rate? Only domestic stock dividends receive preferred rates. To me, this seems like a big deal in large taxable funds .
That turns out to be incorrect. Plenty of foreign dividends are qualified, including about 70% from Vanguard Total International last year, if memory serves.
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Saving$
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Re: International in Taxable - Advantage?

Post by Saving$ »

grabiner wrote:
Saving$ wrote:According to the Wiki, http://www.bogleheads.org/wiki/Principl ... _placement
all other things being equal, if you can put your international allocation in taxable, there is a slight advantage.

I get that if you have millions even a slight advantage makes a difference. But if you are an average investor, how much of an advantage is it really? And is the advantage worth the (presumably) extra complication on the tax return?
The estimates in that wiki page give an advantage of ten basis points for Total International over Total Stock Market in a 25% tax bracket, assuming both funds have a 2% yield before foreign taxes are taken out. That's $50 a year on a $50K investment.

One of the underlying assumptions has not been true in recent years; international stock yields are higher than US yields, and thus the tax costs are close to equal.
There have been a few posts this week on International in Taxable, so I'm referencing this post. To put this in perspective, does the above essentially say with a $50k investment IN INTERNATIONAL, the total advantage after the credit is about $50?

Thus, if someone maxes at a theoretical $1m that is 70 stock/ 30 bonds, with 20% of the stock in international, they would have max $140k in international, so the max savings would be about $140/year. The savings were less when the portfolio was less as the person was ramping up, and decrease as the person spends assets. Also, presumably, as a person ages, the stock percentage goes down, so lets say the $1 mil bottoms out at 50% stocks/50% bonds, still with 20% of the stocks international, which is a low of $100k in international, with a corresponding $100/year savings due to the international credit.

So for those of you who have filed for a credit on the international taxes paid in your taxable international index fund, how long does it take to do the paperwork to get the credit? This would let people evaluate if it is worth it.
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Re: International in Taxable - Advantage?

Post by grabiner »

Saving$ wrote:
grabiner wrote:
Saving$ wrote:According to the Wiki, http://www.bogleheads.org/wiki/Principl ... _placement
all other things being equal, if you can put your international allocation in taxable, there is a slight advantage.

I get that if you have millions even a slight advantage makes a difference. But if you are an average investor, how much of an advantage is it really? And is the advantage worth the (presumably) extra complication on the tax return?
The estimates in that wiki page give an advantage of ten basis points for Total International over Total Stock Market in a 25% tax bracket, assuming both funds have a 2% yield before foreign taxes are taken out. That's $50 a year on a $50K investment.

One of the underlying assumptions has not been true in recent years; international stock yields are higher than US yields, and thus the tax costs are close to equal.
There have been a few posts this week on International in Taxable, so I'm referencing this post. To put this in perspective, does the above essentially say with a $50k investment IN INTERNATIONAL, the total advantage after the credit is about $50?
Yes. That is the value of ten basis points.
Thus, if someone maxes at a theoretical $1m that is 70 stock/ 30 bonds, with 20% of the stock in international, they would have max $140k in international, so the max savings would be about $140/year.

So for those of you who have filed for a credit on the international taxes paid in your taxable international index fund, how long does it take to do the paperwork to get the credit? This would let people evaluate if it is worth it.
If your foreign tax credit is less than $300 single/$600 married filing jointly, it's just one line on your Form 1040 to claim the credit. If the yield on your foreign funds is 3% and you get 7% of that yield in foreign tax credit, you would be under that limit with $140K single/$280K married filing jointly.

If your foreign tax credit is above that limit, you need to file Form 1116 to claim the credit. Tax software does a reasonable job at filling out this form if you answer a few questions; the numbers may not be precisely accurate, but you will usually have enough slack that any error does not affect your taxes. (To fill out the form precisely, you need to know how much of your deductible state income tax was imposed on the foreign income, according to the IRS formula. Your tax software cannot get this number right because you have not yet computed your state income tax at the time you file the form.)
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Re: International in Taxable - Advantage?

Post by FillorKill »

And TLH.

Most of my 2013 TLH was international. All of my 2014 TLH was international.

Having a stockpile of carryovers allows flexibility to rebalance when you have a large taxable portfolio and of course the deduction each year doesn't hurt.
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