? on foreign tax credit

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? on foreign tax credit

Postby Calm Man » Fri Dec 21, 2012 7:59 pm

I know a number of bogleheads hold Total International Stock Fund in taxable accounts, with one advantage being claiming the foreign tax credit. There is a from 1116 which is fairly complex and also has to be replicated for the Alternative Minimum Tax if the foreign tax credit claimed is over $300 for a single taxpayer. Am I doing this calculation correctly to see how much TISM dividends are actually required to exceed the $300 threshold?
Using rough numbers, from the Vanguard site that gives foreign tax credit information (I think it is at the advisors site for some reason), it says that to calculate the foreign tax, it is the $ amount of the foreign dividends x 0.065 (6.5%). So I am assuming that at exactly $300 of foreign tax, this would represent $ 300 divided by 0.065 = $4600 of foreign dividends. Then hypothetically assuming a 2% dividend rate, this $4600 of foreign dividends would be generated from an investment in TISM of $4600 divided by 0.02, which is $230,000. So if the investment in TISM exceeds $230 K one would need Form 1116. Does this make sense?
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Re: ? on foreign tax credit

Postby livesoft » Fri Dec 21, 2012 8:09 pm

A cursory read of your post suggests what you wrote makes sense.

However, I do not fear Form 1116. Tax software does a good job with it nowadays. We have filed 1116 for many years now. I think it's no longer a big deal since the software folks have finally caught up with understanding how to program it ... at least for mutual funds.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: ? on foreign tax credit

Postby Calm Man » Fri Dec 21, 2012 8:38 pm

livesoft wrote:A cursory read of your post suggests what you wrote makes sense.

However, I do not fear Form 1116. Tax software does a good job with it nowadays. We have filed 1116 for many years now. I think it's no longer a big deal since the software folks have finally caught up with understanding how to program it ... at least for mutual funds.


deleted. This was meant to be a PM.
Last edited by Calm Man on Fri Dec 21, 2012 9:01 pm, edited 1 time in total.
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Re: ? on foreign tax credit

Postby livesoft » Fri Dec 21, 2012 8:39 pm

It's the opposite of diehard.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: ? on foreign tax credit

Postby House Blend » Fri Dec 21, 2012 9:17 pm

Calm Man,

You have the right idea, but it should be noted that you are using numbers from 2011, and your dividend rate is way off.

The key unknown variable at this point is the amount of foreign tax as a percentage of the dividend distribution. Last year's number was 6.5%, although I think the historical average is more like 7%. In 2010 it was 8.8%.

I believe this number will not be released until January.

Assuming you held exactly 1000 (Admiral) shares of Total International between September and now, then you would have been paid $746 in dividends. At 7%, that would be $52.22 in foreign taxes. (And your 1099 would report a total of $798.22 = $746 + $52.22 in dividends.)

So to hit $300 in foreign taxes under the 7% and constant number of shares assumption, you'd need 5744.925 shares of VTIAX. Using the price at today's close, that's $142,876.28, give or take a few thousand.
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Re: ? on foreign tax credit

Postby 555 » Sat Dec 22, 2012 2:25 am

What software deals with AMT FTC?
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Re: ? on foreign tax credit

Postby livesoft » Sat Dec 22, 2012 8:58 am

TT asks questions about FTC when going through the AMT stuff, so that's a "deals with" in my book. I am not subject to AMT.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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