Does Global Wellesley Get the Foreign Tax Credit?

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Slowtraveler
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Does Global Wellesley Get the Foreign Tax Credit?

Post by Slowtraveler » Sun Jan 14, 2018 3:59 am

I am debating whether Global Wellesley is worth placing in a Roth because I know when a fund has less than half it's assets from abroad, it is not allowed the foreign tax credit but Wellesley has 46-47% of fund holdings currently as USA so it barely makes the cut. Unless the fund holdings pie chart only refers to stocks. If so, it means bonds may be more domestic and skew the holdings towards domestic. I'm honestly not sure how to read the chart under Portfolio Holdings in that regard.

Tldr; Will I get a foreign tax credit for the international taxes paid on dividends and interest for holding Global Wellesley in a taxable account?

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grabiner
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Re: Does Global Wellesley Get the Foreign Tax Credit?

Post by grabiner » Sun Jan 14, 2018 3:01 pm

Whether the fund is eligible for the foreign tax credit or not, it should be held in a tax-sheltered account. The foreign tax credit will be relatively small, while there are other tax costs from the high dividends on the bonds, and on the capital gains because the stock portfolio is actively managed.

If you hold stock in a taxable account, it should be in an index fund or ETF to avoid the tax costs on capital gains.
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azanon
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Re: Does Global Wellesley Get the Foreign Tax Credit?

Post by azanon » Sun Jan 14, 2018 4:42 pm

grabiner wrote:
Sun Jan 14, 2018 3:01 pm
Whether the fund is eligible for the foreign tax credit or not, it should be held in a tax-sheltered account.
I'm not sure how the global variant will come out, but the US version of Wellesley scores 9, 3, and 16 on Percent Rank in Category, tax analysis, at morningstar relative to all funds that have the same morningstar category (1 is best, 100 is worst). Wellesley's turnover is only 22%.

Like just about everything, it's always better held in tax advantaged because you get to keep more, but by comparison, one could do a lot worse than this one in a taxable.

Global Wellesley only has one score so far - the 1-Mo score. It's 17 ;)
Last edited by azanon on Sun Jan 14, 2018 4:44 pm, edited 1 time in total.

tj
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Re: Does Global Wellesley Get the Foreign Tax Credit?

Post by tj » Sun Jan 14, 2018 4:43 pm

grabiner wrote:
Sun Jan 14, 2018 3:01 pm
Whether the fund is eligible for the foreign tax credit or not, it should be held in a tax-sheltered account. The foreign tax credit will be relatively small, while there are other tax costs from the high dividends on the bonds, and on the capital gains because the stock portfolio is actively managed.

If you hold stock in a taxable account, it should be in an index fund or ETF to avoid the tax costs on capital gains.
This obviously depends on your tax bracket. If you have 0% Dividends and LTCG's, then it make sense to have the foreign tax credit in a taxable account, unless you live somewhere with high state income tax.

halfnine
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Re: Does Global Wellesley Get the Foreign Tax Credit?

Post by halfnine » Sun Jan 14, 2018 6:16 pm

This is all OTOH so I might be mistaken and the numbers are crude. However, a couple of thoughts..

In a fairly typical fund the foreign taxes paid is around 0.2%. For Global Wellesley then crudely maybe we are talking 0.1%. So, if no credit is allowed this would basically be the additional expense of owning the fund.

The FTC is a given up to $300 for someone who is single. ($600 MFJ if the OP marries and opts to have the spouse declared as a resident for tax purposes which has its own advantages and disadvantages. OP is an expat so not sure if/when they will marry or whether spouse would be a US citizen)

So an account with less then 300K/600K (single/MFJ) invested in Global Wellesley would be able to claim the entire FTC. If this is the only foreign taxes paid in taxable and crude estimates are accurate.

Now, once foreign tax paid is above $300/$600 it gets a lot more complicated. My understanding is the OP is intending on retiring early, doing IRA conversions to a ROTH up to the standard deduction of 12K and paying close to zero taxes. Based on my limited understanding the OP may receive no foreign tax credit at this point. In order to recieve a tax credit they would need a tax liability and the tax credit that they would be able to apply would be only be the percentage of foreign income divided by all income (inclusive of the IRA conversion). Kramer ran into something similar here:
viewtopic.php?t=43511

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grabiner
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Re: Does Global Wellesley Get the Foreign Tax Credit?

Post by grabiner » Sun Jan 14, 2018 7:10 pm

azanon wrote:
Sun Jan 14, 2018 4:42 pm
grabiner wrote:
Sun Jan 14, 2018 3:01 pm
Whether the fund is eligible for the foreign tax credit or not, it should be held in a tax-sheltered account.
I'm not sure how the global variant will come out, but the US version of Wellesley scores 9, 3, and 16 on Percent Rank in Category, tax analysis, at morningstar relative to all funds that have the same morningstar category (1 is best, 100 is worst). Wellesley's turnover is only 22%.
But this is based on its good overall performance; note that the tax costs have been about 1.5% by both Morningstar's and Vanguard's measurements. If you are going to hold Wellesley as part of your portfolio, it should go in an IRA so that you don't lose that 1.5%, and your taxable account should hold something else such as stock index funds. Global Wellesley should be similar.

And even 22% turnover isn't enough to eliminate most capital gains; Wellelsey distributed more than 1% of its value in capital gains the last two years, some of it long-term. (Turnover is also misleading here, because some of that turnover is in the bond portion of the fund, which does not lead to significant capital gains.)
Wiki David Grabiner

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