VT Total World Stock ETF and the Foreign Tax Credit Pinch Out

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Risk seeker
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VT Total World Stock ETF and the Foreign Tax Credit Pinch Out

Post by Risk seeker » Tue Jan 09, 2018 6:06 pm

An ETF is only permitted to pass through foreign tax credits (FTCs) to its shareholders if more than 50% of the value of the ETF's assets is invested in non-U.S. corporations on December 31. IRC Sec. 853(a)(1).

VT's "Statement of Additional Information" states "if, at the close of its fiscal year, more than 50% of a fund’s total assets are invested in securities of foreign issuers, the fund may elect to pass through to shareholders the ability to deduct or, if they meet certain holding period requirements, take a credit for foreign taxes paid by the fund." Page B-20 of VT's SAI.

As of November 30, 2017, only 48% of VT's assets were invested in non-U.S. corporations. If this percentage held through December 31, 2017, VT's shareholders will face a classic FTC pinch-out where the fund won't be permitted to pass through foreign tax credits to its shareholders. VT's shareholders could have avoided this risk by holding shares in VTI (total U.S.) and VXUS (total non-U.S.) in lieu of VT. Buyer beware.

Longtermgrowth
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Re: VT Total World Stock ETF and the Foreign Tax Credit Pinch Out

Post by Longtermgrowth » Wed Jan 10, 2018 8:09 pm

Interesting! Thanks for letting us know.
I have seen some recommend VT for taxable, but knowing this possibility, it could be a very bad recommendation.

drk
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Re: VT Total World Stock ETF and the Foreign Tax Credit Pinch Out

Post by drk » Wed Jan 10, 2018 9:31 pm

Longtermgrowth wrote:
Wed Jan 10, 2018 8:09 pm
Interesting! Thanks for letting us know.
I have seen some recommend VT for taxable, but knowing this possibility, it could be a very bad recommendation.
Even aside from this, I think it's a bad recommendation because, while simple, it eliminates any tax-loss harvesting.

Longtermgrowth
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Re: VT Total World Stock ETF and the Foreign Tax Credit Pinch Out

Post by Longtermgrowth » Thu Jan 11, 2018 1:19 am

Indeed. I specifically remember one member here recommending a combo of total stock market along with VT for the international portion. It doesn't make any sense at all at that point, since already holding two funds. Keep international total international for taxable accounts!

The info provided by op should really be a sticky or posted in the wiki where all can see when researching the three fund portfolio...

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spdoublebass
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Re: VT Total World Stock ETF and the Foreign Tax Credit Pinch Out

Post by spdoublebass » Thu Jan 11, 2018 1:36 am

Longtermgrowth wrote:
Thu Jan 11, 2018 1:19 am
Indeed. I specifically remember one member here recommending a combo of total stock market along with VT for the international portion. It doesn't make any sense at all at that point, since already holding two funds. Keep international total international for taxable accounts!
I hold VT, but I don't in Taxable. I haven't read too many posts that advice holding it in Taxable. I think the OP addressed a great point, but there is also the turnover % and TLH issue as well.

There are many people who are on BH who struggle to max out their Roth IRA's and 401K's. They haven't reached the point to consider a taxable account. I don't think them going with VT is that big of an issue, or as they say there are many worse mistakes.
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boglechu
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Re: VT Total World Stock ETF and the Foreign Tax Credit Pinch Out

Post by boglechu » Thu Jan 11, 2018 2:40 am

How significant is foreign tax credit if I invested $20,000 in vxus?

Longtermgrowth
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Re: VT Total World Stock ETF and the Foreign Tax Credit Pinch Out

Post by Longtermgrowth » Thu Jan 11, 2018 5:20 am

boglechu wrote:
Thu Jan 11, 2018 2:40 am
How significant is foreign tax credit if I invested $20,000 in vxus?
Before the decent run-up in VXUS, back towards the end of 2016, I was trying to find out how much I could put in it without having to deal with form 1116 for a single filer. It was a hair below 150k invested at that point in time. Even 20k will give something back (part of the cost of your tax software?) enough to be worth splitting the funds in taxable.

rkhusky
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Re: VT Total World Stock ETF and the Foreign Tax Credit Pinch Out

Post by rkhusky » Thu Jan 11, 2018 10:09 am

Longtermgrowth wrote:
Thu Jan 11, 2018 5:20 am
boglechu wrote:
Thu Jan 11, 2018 2:40 am
How significant is foreign tax credit if I invested $20,000 in vxus?
Before the decent run-up in VXUS, back towards the end of 2016, I was trying to find out how much I could put in it without having to deal with form 1116 for a single filer. It was a hair below 150k invested at that point in time. Even 20k will give something back (part of the cost of your tax software?) enough to be worth splitting the funds in taxable.
Keep in mind that international pays a higher dividend with less being qualified than US, which eats into your foreign tax credit.

In the recent past, the tax credit was worth about 0.2%, i.e. about $40 for $20K in a typical int'l fund.

If one is trying to determine between US and Int'l in taxable, Total Stock has about a 2% dividend and Total Int'l is about 3%, with about 95% qualified for Total Stock and 70% qualified for Total Int'l. If you are in the 25% bracket, with 15% qualified rate, it looks likes that ends up costing an additional $45 in tax for $20K, which is more than the tax credit. In the 15% bracket (with 0% qualified rate), the difference is about $25, which is less than the credit.

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Tyler Aspect
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Re: VT Total World Stock ETF and the Foreign Tax Credit Pinch Out

Post by Tyler Aspect » Thu Jan 11, 2018 12:54 pm

To the Board of Trustees of Vanguard International Equity Index Funds and the Shareholders of Vanguard Total World Stock Index Fund

In our opinion, the accompanying statement of net assets—investments summary and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Vanguard Total World Stock Index Fund (constituting a separate portfolio of Vanguard International Equity Index Funds, hereafter referred to as the “Fund”) as of October 31, 2017, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
(begin my conjecture)

VT could be internally organized as a funds of funds, so that it may distribute foreign tax credit even when the proportion of US stock is greater than 50%. It distributed foreign tax credit last year when US stock proportion was already at 53%.

Let's wait until next month to see if VT declares a foreign tax credit.
Past result does not predict future performance. Mentioned investments may lose money. Contents are presented "AS IS" and any implied suitability for a particular purpose are disclaimed.

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pokebowl
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Re: VT Total World Stock ETF and the Foreign Tax Credit Pinch Out

Post by pokebowl » Thu Jan 11, 2018 1:44 pm

Unless I am mistaken VT has always passed along FTC and provided a means to calculate it. Even with US being 50%+ of the index.

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grabiner
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Re: VT Total World Stock ETF and the Foreign Tax Credit Pinch Out

Post by grabiner » Thu Jan 11, 2018 9:48 pm

boglechu wrote:
Thu Jan 11, 2018 2:40 am
How significant is foreign tax credit if I invested $20,000 in vxus?
Most foreign stock funds have a credit of about 7% of the dividend. With a yield of about 3%, that would be a $600 dividend and $42 foreign tax credit.

For VT, which is only half foreign, the credit would be about 7% of the foreign half, which is $21 on a $20,000 investment.
Wiki David Grabiner

Risk seeker
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Re: VT Total World Stock ETF and the Foreign Tax Credit Pinch Out

Post by Risk seeker » Sun Jan 14, 2018 7:19 pm

spdoublebass wrote:
Thu Jan 11, 2018 1:36 am
turnover %
Do you know what's driving the high turnover percentage? For a passive fund like this I would have expected a much lower percentage. The prospectus is showing 15% turnover in 2016 on $6B of assets (nearly $1B of churn). The average annual turnover for the last five years has been 11.4%. VT's expense ratio is relatively low but all of this trading is likely expensive (e.g., commissions, bid-ask spreads, and stamp duties on certain exchanges).

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spdoublebass
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Re: VT Total World Stock ETF and the Foreign Tax Credit Pinch Out

Post by spdoublebass » Sun Jan 14, 2018 11:51 pm

Risk seeker wrote:
Sun Jan 14, 2018 7:19 pm
spdoublebass wrote:
Thu Jan 11, 2018 1:36 am
turnover %
Do you know what's driving the high turnover percentage? For a passive fund like this I would have expected a much lower percentage. The prospectus is showing 15% turnover in 2016 on $6B of assets (nearly $1B of churn). The average annual turnover for the last five years has been 11.4%. VT's expense ratio is relatively low but all of this trading is likely expensive (e.g., commissions, bid-ask spreads, and stamp duties on certain exchanges).
I am not advanced in any of this really. I do not know if this affects the turnover %, but it did change indexes recently. I know some things were added to EM as well this past year. I still think it's sorting itself out from all the changes, one of which was adding small caps.
BUT, I would seek answers elsewhere, I really shouldn't be answering these types of questions on this forum. I hold it in a tax deferred account, so I don't really care that much.
Resist much, obey little.

tonycost
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Re: VT Total World Stock ETF and the Foreign Tax Credit Pinch Out

Post by tonycost » Sun Mar 04, 2018 11:37 am

Tyler Aspect wrote:
Thu Jan 11, 2018 12:54 pm
To the Board of Trustees of Vanguard International Equity Index Funds and the Shareholders of Vanguard Total World Stock Index Fund

In our opinion, the accompanying statement of net assets—investments summary and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Vanguard Total World Stock Index Fund (constituting a separate portfolio of Vanguard International Equity Index Funds, hereafter referred to as the “Fund”) as of October 31, 2017, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
(begin my conjecture)

VT could be internally organized as a funds of funds, so that it may distribute foreign tax credit even when the proportion of US stock is greater than 50%. It distributed foreign tax credit last year when US stock proportion was already at 53%.

Let's wait until next month to see if VT declares a foreign tax credit.
Just wanted to follow up on this, since I've been thinking of holding Vanguard Total World Index Fund (VT) in taxable. Does anyone know if Tyler Aspect's thought on this is correct? It seems like VT has always passed through Foreign Tax Credit

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Tyler Aspect
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Re: VT Total World Stock ETF and the Foreign Tax Credit Pinch Out

Post by Tyler Aspect » Sun Mar 04, 2018 12:27 pm

VT's tax year 2017 foreign tax credit was declared on Vanguard's web site normally. Business as usual.
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