Foreign Tax-Please check my math

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2beachcombers
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Foreign Tax-Please check my math

Post by 2beachcombers » Mon Jan 29, 2018 10:16 am

After analyizing my Investments using triceratop's Tax Efficiency analysis, I moved all my deferred international funds to my Brokerage account.Table below shows 2017 results I think are too good to be true.

............Div ... QDI ... NQDI ...%QDI... Ftpaid

FPMAX .3392 ... 2067 .. 1325... 61% ... 368
IEUR ... 8484 ... 7950 ... 534... 94%.... 615
IPAC ....5418 ...3592 ... 1826... 66% ... 305
VSS .....5721 ...2422 ....3299 .. 42% ... 318
totals
........23015 ...16031... 6984 ... 70% ... 1606(credit)

Calculating US taxes(used new 22% tax rate): and Subtracting Foreign tax credit:

............. 15% ... 22%... total ..%total ..net tax/Div
FPMAX ... . 310 ... 292 ... 602 .. ... 19% ... 8.59%
IEUR ... .. 1193 ... 117 ... 1310 ...... 8% ... 1.38%
IPAC ........ 539 ... 402 ... 941 ...... 26% ... 7.41%
VSS ... .... 363 ... 726 ....1089 ...... 47% .. 12.69%
total ......2405 ... 1536 .. 3941

3941 us tax
-1606
2335 NET US TAX = 10% :happy

Suprised that my net tax is less than 15% and equal to 10%.
And moving VSS back to deferred would futher reduce the tax due to the NQ%

edited redundant data
Last edited by 2beachcombers on Mon Jan 29, 2018 10:30 am, edited 1 time in total.

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in_reality
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Re: Foreign Tax-Please check my math

Post by in_reality » Mon Jan 29, 2018 10:23 am

Did you calculate your allowed carryover on form 1116?

I always have a carryover and can never claim the full amount I paid.

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Re: Foreign Tax-Please check my math

Post by 2beachcombers » Mon Jan 29, 2018 10:31 am

Thanks, and yes I always check--in my case no carry over this year

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Re: Foreign Tax-Please check my math

Post by triceratop » Mon Jan 29, 2018 10:37 am

As an aside I think my numbers are slightly off for Vanguard fund family funds. They should be slightly less efficient than shown because I have been using the distribution amounts while for foreign funds that is not total ordinary dividends. Buyer beware.
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Re: Foreign Tax-Please check my math

Post by Wagnerjb » Mon Jan 29, 2018 12:09 pm

2beachcombers wrote:
Mon Jan 29, 2018 10:16 am

Calculating US taxes(used new 22% tax rate): and Subtracting Foreign tax credit:

............. 15% ... 22%... total ..%total ..net tax/Div
FPMAX ... . 310 ... 292 ... 602 .. ... 19% ... 8.59%
IEUR ... .. 1193 ... 117 ... 1310 ...... 8% ... 1.38%
IPAC ........ 539 ... 402 ... 941 ...... 26% ... 7.41%
VSS ... .... 363 ... 726 ....1089 ...... 47% .. 12.69%
total ......2405 ... 1536 .. 3941

3941 us tax
-1606
2335 NET US TAX = 10% :happy

Suprised that my net tax is less than 15% and equal to 10%.
I would describe your taxes a little differently:

You are paying 17% in US Federal Tax. That is a weighted average of 15% and 22% for your dividends.

You already paid 7% in foreign tax withholdings. You will have your US Federal Tax reduced by this 7%, with the bottom line that you - in essence - didn't have to pay the foreign tax.

The bottom line is that you are paying 17% on your dividends.

If your foreign tax withholdings had been 16%, your "net US tax" would have been only 1%. Would that have made you even happier? :D

Best wishes.
Andy

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Re: Foreign Tax-Please check my math

Post by livesoft » Mon Jan 29, 2018 12:57 pm

Since you have more than $20,000 in foreign dividend income, you have to use the special calculations ("adjustments") described in Publication 514 and in Form 1116 as described in the instructions. I am guessing you ignored that complication in your math, but I don't know for sure.
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Re: Foreign Tax-Please check my math

Post by 2beachcombers » Mon Jan 29, 2018 1:45 pm

Wagnerjb-understand the 17% weighted average. And I deduct the 7% for Int.
If these dividends were US, I would pay 17%
Since I get the 7% deducted, I pay 17%-7% or 10%
If these dividends were in deferred accounts, I would still pay the 7%-but no credit.

Maybe I can't see the forest for the trees? :confused
:oops:
light bulb just went off in my ancient brain----I am really paying 24%(17% US PLUS the 7% INT tax already paid).
:oops: :oops: :oops:

If your foreign tax withholdings had been 16%, your "net US tax" would have been only 1%. Would that have made you even happier
? :D-----17% + 19% -19% = 17% :beer
Thanks for your simple example, it helped me to think thru this.


triceratop--I believe my #'s are correct as I took them from my yearend tax summary under the headings in the spreadsheet in the post.


Livesoft--Thanks, you are still educating me. Since this is my first time over 20K$ int. dividends, was not aware of calculation. Will update post on the 31st when TurboTax imports my data. I will also take a look at Pub 514 and form 1116.

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Re: Foreign Tax-Please check my math

Post by House Blend » Mon Jan 29, 2018 10:05 pm

livesoft wrote:
Mon Jan 29, 2018 12:57 pm
Since you have more than $20,000 in foreign dividend income, you have to use the special calculations ("adjustments") described in Publication 514 and in Form 1116 as described in the instructions. I am guessing you ignored that complication in your math, but I don't know for sure.
No, it's $20K in foreign *qualified* dividends that requires adjustments. OP seems to have only $16K of those, so a bit of headroom remains.

The adjustment also kicks in if Taxable Income minus QDI leaves you in the 33% bracket or higher.

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Re: Foreign Tax-Please check my math

Post by kramer » Tue Jan 30, 2018 1:50 am

House Blend wrote:
Mon Jan 29, 2018 10:05 pm
livesoft wrote:
Mon Jan 29, 2018 12:57 pm
Since you have more than $20,000 in foreign dividend income, you have to use the special calculations ("adjustments") described in Publication 514 and in Form 1116 as described in the instructions. I am guessing you ignored that complication in your math, but I don't know for sure.
No, it's $20K in foreign *qualified* dividends that requires adjustments. OP seems to have only $16K of those, so a bit of headroom remains.

The adjustment also kicks in if Taxable Income minus QDI leaves you in the 33% bracket or higher.
Can you provide any more detail or a link for this? I am interested in learning more.

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Re: Foreign Tax-Please check my math

Post by 2beachcombers » Tue Jan 30, 2018 8:19 am

House Blend--thanks for the update and correction--and I still have a way to go before the 20K kicks in

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Re: Foreign Tax-Please check my math

Post by House Blend » Tue Jan 30, 2018 9:54 am

kramer wrote:
Tue Jan 30, 2018 1:50 am
House Blend wrote:
Mon Jan 29, 2018 10:05 pm
No, it's $20K in foreign *qualified* dividends that requires adjustments. OP seems to have only $16K of those, so a bit of headroom remains.

The adjustment also kicks in if Taxable Income minus QDI leaves you in the 33% bracket or higher.
Can you provide any more detail or a link for this? I am interested in learning more.
It's in the instructions for Form 1116.
https://www.irs.gov/pub/irs-pdf/i1116.pdf

Regarding whether one has to adjust for the fact that qualified dividends are taxed at a lower rate...
The IRS wrote:You qualify for the adjustment exception if you meet both of the following requirements.
1. Line 7 of the Qualified Dividends and Capital Gain Tax Worksheet doesn't exceed:
a. $233,350 if married filing jointly or qualifying widow(er),
b. $116,675 if married filing separately,
c. $191,650 if single, or
d. $212,500 if head of household.

2. The amount of your foreign source capital gain distributions, plus the amount of your foreign source qualified dividends, is less than $20,000. For this purpose, ignore any capital gain distributions or qualified dividends you elected to include on Form 4952, line 4g.
The theory behind the FTC and this adjustment is as follows:

You've paid foreign taxes on foreign income.
The US taxes that income as well, so in its infinite benevolence the US allows you to take a credit for the smaller of what you paid in foreign taxes and what you paid in US taxes on the foreign income.

Where it gets "interesting" is in determining how much US tax you paid on that income. To a first approximation, it is simple proration: if 10% of your income was from foreign sources, then 10% of your US tax bill is the amount of tax you paid on this foreign income. However, once you reach the point where you don't qualify for the adjustment exception, then you have to take into account that the US taxes qualified dividends at a lower rate. As a result it is no longer a simple proration, and it becomes more likely that you will not be able to claim the full credit.

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Re: Foreign Tax-Please check my math

Post by livesoft » Tue Jan 30, 2018 10:07 am

I wish to also extend my thanks. At some point, we need to have a tutorial on Form 1116 with screen captures for the 3 or 4 major cases.
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Re: Foreign Tax-Please check my math

Post by 2beachcombers » Tue Jan 30, 2018 12:11 pm

Yous guys are Great!!----More Math checks please. and a reason for Internationals in Brokerage account ?

Case1... taxable = domestic 95% QD.......Tax=15% and International in Roth, US tax = 0; Plus 7% Int. Tax

Case2...taxable = International 70% QD...Tax=7%(int)+17%(US)-7%(credit)=17% and domestic in Roth, US tax = 0**

With 50-50 domesic-Int. Case 1 = (22%/2 ) and Case 2 = (17%/2) 8-)

** US Tax basis 18% on Basis, presently 5% on total

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Re: Foreign Tax-Please check my math

Post by train12 » Tue Jan 30, 2018 12:37 pm

2beachcombers wrote:
Mon Jan 29, 2018 10:16 am
After analyizing my Investments using triceratop's Tax Efficiency analysis, I moved all my deferred international funds to my Brokerage account.Table below shows 2017 results I think are too good to be true.
Do you have a link to the Tax Efficiency analysis? I'm curious and want to take a look too.

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Re: Foreign Tax-Please check my math

Post by triceratop » Tue Jan 30, 2018 12:42 pm

It is here: viewtopic.php?t=208818

However it does not use the correct ordinary dividend information because the amount withheld for foreign tax is also taxable US income. This will be fixed in the 2017 sheet (and retroactively fixed for the 2016 one). How embarrassing for me!
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Re: Foreign Tax-Please check my math

Post by in_reality » Tue Jan 30, 2018 8:16 pm

House Blend wrote:
Tue Jan 30, 2018 9:54 am

The theory behind the FTC and this adjustment is as follows:

You've paid foreign taxes on foreign income.
The US taxes that income as well, so in its infinite benevolence the US allows you to take a credit for the smaller of what you paid in foreign taxes and what you paid in US taxes on the foreign income.
That's true as a rule for double taxation generally. And if an account is tax sheltered in a foreign country, you will get no credit against US taxes. Never-mind that everyone else in that country pays a lower rate than you because they can take advantage of retirement accounts.
House Blend wrote:
Tue Jan 30, 2018 9:54 am
Where it gets "interesting" is in determining how much US tax you paid on that income. To a first approximation, it is simple proration: if 10% of your income was from foreign sources, then 10% of your US tax bill is the amount of tax you paid on this foreign income. However, once you reach the point where you don't qualify for the adjustment exception, then you have to take into account that the US taxes qualified dividends at a lower rate. As a result it is no longer a simple proration, and it becomes more likely that you will not be able to claim the full credit.
I suspect more people will start to have carryovers.

One reason it becomes more likely is that your net foreign source taxable income is reduced by a prorated amount of your US standard deduction (which just increased). So even though you have paid foreign taxes on foreign income, you can't claim the full amount because subtracting the US standard deduction from foreign income results in a ratio less than 1, and that ratio is multiplied by foreign taxes paid to calculate your credit.

I think it falls into the "clearly wrong and unfair" but "nothing will be done about it" category because expats are few and it's too easy for someone to create a false perception of escaping taxes by being overseas that won't be well recieved.

So you have to figure out how much extra it's worth to go overseas (either as an expat or investor) and whether that makes sense given the higher costs of doing so.

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Re: Foreign Tax-Please check my math

Post by grabiner » Thu Feb 01, 2018 12:21 am

in_reality wrote:
Tue Jan 30, 2018 8:16 pm
I suspect more people will start to have carryovers.

One reason it becomes more likely is that your net foreign source taxable income is reduced by a prorated amount of your US standard deduction (which just increased). So even though you have paid foreign taxes on foreign income, you can't claim the full amount because subtracting the US standard deduction from foreign income results in a ratio less than 1, and that ratio is multiplied by foreign taxes paid to calculate your credit.

I think it falls into the "clearly wrong and unfair" but "nothing will be done about it" category because expats are few and it's too easy for someone to create a false perception of escaping taxes by being overseas that won't be well received.
This is fair, because it affects your tax rate. Suppose that your total income is $120K, and you pay $12K in US tax. Your US tax is 10% of your total income, even though it is 12.5% of your taxable income after you take the $24K standard deduction. If you have $10K in foreign income on which you paid $1100 in tax, your foreign income is 11% of your total income, and your credit is limited to 10% of your total tax, giving you a $100 carryover. Prorating the standard deduction, you paid tax on only $8K of the foreign income and $88K of the US income.

Most states work the same way for the credit on tax paid to other states. If 10% of your income was taxed by another state, you can only take a credit of 10% of your home-state tax, even if the other state taxed your income at a higher rate. (And that other state probably computed its tax on your full income, then charged you 10% of that amount in tax because only 10% of your income was earned there.)

Form 1116 does make exceptions, considering certain deductions to be directly related only to US or foreign income. In particular, if you itemize deductions, charitable contributions are connected only to your US income, since they can only go to US charities.

(edited to fix typo)
Last edited by grabiner on Thu Feb 01, 2018 8:35 pm, edited 1 time in total.
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Re: Foreign Tax-Please check my math

Post by 2beachcombers » Thu Feb 01, 2018 9:31 am

grabiner wrote:
Thu Feb 01, 2018 12:21 am
in_reality wrote:
Tue Jan 30, 2018 8:16 pm
I suspect more people will start to have carryovers.

One reason it becomes more likely is that your net foreign source taxable income is reduced by a prorated amount of your US standard deduction (which just increased). So even though you have paid foreign taxes on foreign income, you can't claim the full amount because subtracting the US standard deduction from foreign income results in a ratio less than 1, and that ratio is multiplied by foreign taxes paid to calculate your credit.

I think it falls into the "clearly wrong and unfair" but "nothing will be done about it" category because expats are few and it's too easy for someone to create a false perception of escaping taxes by being overseas that won't be well received.
This is fair, because it affects your tax rate. Suppose that your total income is $120K, and you pay $12K in US tax. Your US tax is 10% of your total income, even though it is 12.5% of your taxable income after you take the $24K standard deduction. If you have $10K in foreign income on which you paid $1100 in tax, your foreign tax is 11% of your total income, and your credit is limited to 10%, giving you a $100 carryover. Prorating the standard deduction, you paid tax on only $8K of the foreign income and $88K of the US income.

Most states work the same way for the credit on tax paid to other states. If 10% of your income was taxed by another state, you can only take a credit of 10% of your home-state tax, even if the other state taxed your income at a higher rate. (And that other state probably computed its tax on your full income, then charged you 10% of that amount in tax because only 10% of your income was earned there.)

Form 1116 does make exceptions, considering certain deductions to be directly related only to US or foreign income. In particular, if you itemize deductions, charitable contributions are connected only to your US income, since they can only go to US charities.
David--the foreign tax noted above -should it not be foreign income?
jerry

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Re: Foreign Tax-Please check my math

Post by grabiner » Thu Feb 01, 2018 8:36 pm

2beachcombers wrote:
Thu Feb 01, 2018 9:31 am
grabiner wrote:
Thu Feb 01, 2018 12:21 am
If you have $10K in foreign income on which you paid $1100 in tax, your foreign tax is 11% of your total income, and your credit is limited to 10%, giving you a $100 carryover. Prorating the standard deduction, you paid tax on only $8K of the foreign income and $88K of the US income.
David--the foreign tax noted above -should it not be foreign income?
jerry
Fixed above; thanks for catching the typo.
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Re: Foreign Tax-Please check my math

Post by JustinR » Sun May 27, 2018 3:14 am

2beachcombers wrote:
Mon Jan 29, 2018 10:16 am
After analyizing my Investments using triceratop's Tax Efficiency analysis, I moved all my deferred international funds to my Brokerage account.Table below shows 2017 results I think are too good to be true.

............Div ... QDI ... NQDI ...%QDI... Ftpaid

FPMAX .3392 ... 2067 .. 1325... 61% ... 368
IEUR ... 8484 ... 7950 ... 534... 94%.... 615
IPAC ....5418 ...3592 ... 1826... 66% ... 305
VSS .....5721 ...2422 ....3299 .. 42% ... 318
totals
........23015 ...16031... 6984 ... 70% ... 1606(credit)

Calculating US taxes(used new 22% tax rate): and Subtracting Foreign tax credit:

............. 15% ... 22%... total ..%total ..net tax/Div
FPMAX ... . 310 ... 292 ... 602 .. ... 19% ... 8.59%
IEUR ... .. 1193 ... 117 ... 1310 ...... 8% ... 1.38%
IPAC ........ 539 ... 402 ... 941 ...... 26% ... 7.41%
VSS ... .... 363 ... 726 ....1089 ...... 47% .. 12.69%
total ......2405 ... 1536 .. 3941

3941 us tax
-1606
2335 NET US TAX = 10% :happy

Suprised that my net tax is less than 15% and equal to 10%.
And moving VSS back to deferred would futher reduce the tax due to the NQ%

edited redundant data
Sorry, I'm not understanding.

In tax-deferred, you'd be paying $1,606 in taxes.

In taxable, you'd be paying $3,941 in taxes.

Why would you move them to taxable?

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Re: Foreign Tax-Please check my math

Post by 2beachcombers » Sun May 27, 2018 5:08 am

JustinR wrote:
Sun May 27, 2018 3:14 am
2beachcombers wrote:
Mon Jan 29, 2018 10:16 am
After analyizing my Investments using triceratop's Tax Efficiency analysis, I moved all my deferred international funds to my Brokerage account.Table below shows 2017 results I think are too good to be true.

............Div ... QDI ... NQDI ...%QDI... Ftpaid

FPMAX .3392 ... 2067 .. 1325... 61% ... 368
IEUR ... 8484 ... 7950 ... 534... 94%.... 615
IPAC ....5418 ...3592 ... 1826... 66% ... 305
VSS .....5721 ...2422 ....3299 .. 42% ... 318
totals
........23015 ...16031... 6984 ... 70% ... 1606(credit)

Calculating US taxes(used new 22% tax rate): and Subtracting Foreign tax credit:

............. 15% ... 22%... total ..%total ..net tax/Div
FPMAX ... . 310 ... 292 ... 602 .. ... 19% ... 8.59%
IEUR ... .. 1193 ... 117 ... 1310 ...... 8% ... 1.38%
IPAC ........ 539 ... 402 ... 941 ...... 26% ... 7.41%
VSS ... .... 363 ... 726 ....1089 ...... 47% .. 12.69%
total ......2405 ... 1536 .. 3941

3941 us tax
-1606
2335 NET US TAX = 10% :happy

Suprised that my net tax is less than 15% and equal to 10%.
And moving VSS back to deferred would futher reduce the tax due to the NQ%

edited redundant data
Sorry, I'm not understanding.

In tax-deferred, you'd be paying $1,606 in taxes. Tax deferred= no tax

In taxable, you'd be paying $3,941 in taxes. taxable =3941-1606; as no FTcredit for internationals in deferred

Why would you move them to taxable? Reduces my annual tax b y1600$

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Re: Foreign Tax-Please check my math

Post by JustinR » Sun May 27, 2018 5:34 am

2beachcombers wrote:
Sun May 27, 2018 5:08 am
JustinR wrote:
Sun May 27, 2018 3:14 am
2beachcombers wrote:
Mon Jan 29, 2018 10:16 am
After analyizing my Investments using triceratop's Tax Efficiency analysis, I moved all my deferred international funds to my Brokerage account.Table below shows 2017 results I think are too good to be true.

............Div ... QDI ... NQDI ...%QDI... Ftpaid

FPMAX .3392 ... 2067 .. 1325... 61% ... 368
IEUR ... 8484 ... 7950 ... 534... 94%.... 615
IPAC ....5418 ...3592 ... 1826... 66% ... 305
VSS .....5721 ...2422 ....3299 .. 42% ... 318
totals
........23015 ...16031... 6984 ... 70% ... 1606(credit)

Calculating US taxes(used new 22% tax rate): and Subtracting Foreign tax credit:

............. 15% ... 22%... total ..%total ..net tax/Div
FPMAX ... . 310 ... 292 ... 602 .. ... 19% ... 8.59%
IEUR ... .. 1193 ... 117 ... 1310 ...... 8% ... 1.38%
IPAC ........ 539 ... 402 ... 941 ...... 26% ... 7.41%
VSS ... .... 363 ... 726 ....1089 ...... 47% .. 12.69%
total ......2405 ... 1536 .. 3941

3941 us tax
-1606
2335 NET US TAX = 10% :happy

Suprised that my net tax is less than 15% and equal to 10%.
And moving VSS back to deferred would futher reduce the tax due to the NQ%

edited redundant data
Sorry, I'm not understanding.

In tax-deferred, you'd be paying $1,606 in taxes. Tax deferred= no tax

In taxable, you'd be paying $3,941 in taxes. taxable =3941-1606; as no FTcredit for internationals in deferred

Why would you move them to taxable? Reduces my annual tax b y1600$
In tax-deferred, you pay $1,606 in total taxes ($0 in US taxes and $1,606 in foreign taxes).

In taxable, you pay $3,941 in total taxes ($2,335 in US taxes and $1,606 in foreign taxes).

The foreign tax credit doesn't reduce your taxes at all...it just makes it so you're not double taxed on the foreign part.

Am I misunderstanding how the foreign tax credit works or what you're doing?

Edit: Oh, I think I get it. If you put non-international funds in your tax-deferred instead of these foreign taxed funds, you would save on taxes that way right?

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Re: Foreign Tax-Please check my math

Post by 2beachcombers » Sun May 27, 2018 7:05 am

JustinR wrote:
Sun May 27, 2018 5:34 am
2beachcombers wrote:
Sun May 27, 2018 5:08 am
JustinR wrote:
Sun May 27, 2018 3:14 am
2beachcombers wrote:
Mon Jan 29, 2018 10:16 am
After analyizing my Investments using triceratop's Tax Efficiency analysis, I moved all my deferred international funds to my Brokerage account.Table below shows 2017 results I think are too good to be true.

............Div ... QDI ... NQDI ...%QDI... Ftpaid

FPMAX .3392 ... 2067 .. 1325... 61% ... 368
IEUR ... 8484 ... 7950 ... 534... 94%.... 615
IPAC ....5418 ...3592 ... 1826... 66% ... 305
VSS .....5721 ...2422 ....3299 .. 42% ... 318
totals
........23015 ...16031... 6984 ... 70% ... 1606(credit)

Calculating US taxes(used new 22% tax rate): and Subtracting Foreign tax credit:

............. 15% ... 22%... total ..%total ..net tax/Div
FPMAX ... . 310 ... 292 ... 602 .. ... 19% ... 8.59%
IEUR ... .. 1193 ... 117 ... 1310 ...... 8% ... 1.38%
IPAC ........ 539 ... 402 ... 941 ...... 26% ... 7.41%
VSS ... .... 363 ... 726 ....1089 ...... 47% .. 12.69%
total ......2405 ... 1536 .. 3941

3941 us tax
-1606
2335 NET US TAX = 10% :happy

Suprised that my net tax is less than 15% and equal to 10%.
And moving VSS back to deferred would futher reduce the tax due to the NQ%

edited redundant data
Sorry, I'm not understanding.

In tax-deferred, you'd be paying $1,606 in taxes. Tax deferred= no tax

In taxable, you'd be paying $3,941 in taxes. taxable =3941-1606; as no FTcredit for internationals in deferred

Why would you move them to taxable? Reduces my annual tax b y1600$
In tax-deferred, you pay $1,606 in total taxes ($0 in US taxes and $1,606 in foreign taxes).

In taxable, you pay $3,941 in total taxes ($2,335 in US taxes and $1,606 in foreign taxes).

The foreign tax credit doesn't reduce your taxes at all...it just makes it so you're not double taxed on the foreign part.

Am I misunderstanding how the foreign tax credit works or what you're doing?

Edit: Oh, I think I get it. If you put non-international funds in your tax-deferred instead of these foreign taxed funds, you would save on taxes that way right? BINGO

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Re: Foreign Tax-Please check my math

Post by LadyGeek » Sun May 27, 2018 6:26 pm

This thread is now in the Personal Finance (Not Investing) forum (taxes).
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