VT/VTWAX (Vanguard Total World Stock) is maligned for its lack of foreign tax credit. I think that's unfair.

[VTI]

Because VT/VTWAX contain less than 50% international stocks, those funds are not eligible for the foreign tax credit (FTC).

For eligible funds like the VXUS/VTIAX (Vanguard Total International Stock), the FTC effectively refunds the taxes you paid to foreign governments on dividends. Uncle Sam taxes you at the gross pre-foreign-tax earnings, and then you are credited back the foreign taxes you paid. This prevents double taxation.

However, all is not lost for VT/VTWAX. Yes, the FTC is not available, but Uncle Sam taxes your lower net post-foreign-tax earnings. No, this foreign tax deduction is not as good, but it’s rarely mentioned during public handwringing about the lack of foreign tax credit.

Ultimately, the difference between the two approaches depends on your individual tax rate. However, I would be stunned if the difference ever exceeds 10 basis points annually, and it’s almost certainly less than that.

I would argue that $5–10 per $10,000 is an acceptable price to pay for the simplicity and behavioral advantages of owning a single, “non-tinkerable” fund.

[dboeger1]

Assuming we're strictly talking about taxable accounts based on the topic of the foreign tax credit, I think it's less a matter of acceptability and more that people just want to make the optimal choices up-front to avoid having to sell down the line and trigger taxable events or continue to pay unnecessary ongoing costs. I've actually owned VTWAX in taxable for quite some time, but I'm actually in the process of converting it all to bonds as part of an intentional shift in AA, and my plan is to put future investments in VTI+VXUS. I actually tried VTI+VXUS in the past and hated the transactional experience of ETFs when compared to mutual funds, but that was actually before VTWAX became ineligible for the foreign tax credit, and missing out on it has bugged me ever since. I mostly agree with you about the acceptability of the cost for smaller amounts, but for hundreds of thousands of dollars that I expect to compound over decades, it just doesn't make too much sense to lock oneself into paying extra. In tax-advantaged accounts, you can at least change your mind without cost, but not in taxable.

[VTI]

Assuming we're strictly talking about taxable accounts based on the topic of the foreign tax credit, I think it's less a matter of acceptability and more that people just want to make the optimal choices up-front to avoid having to sell down the line and trigger taxable events or continue to pay unnecessary ongoing costs. I've actually owned VTWAX in taxable for quite some time, but I'm actually in the process of converting it all to bonds as part of an intentional shift in AA, and my plan is to put future investments in VTI+VXUS. I actually tried VTI+VXUS in the past and hated the transactional experience of ETFs when compared to mutual funds, but that was actually before VTWAX became ineligible for the foreign tax credit, and missing out on it has bugged me ever since. I mostly agree with you about the acceptability of the cost for smaller amounts, but for hundreds of thousands of dollars that I expect to compound over decades, it just doesn't make too much sense to lock oneself into paying extra. In tax-advantaged accounts, you can at least change your mind without cost, but not in taxable.

That's totally fair, actually. No one has to agree that VT/VTWAX's simplicity and potential behavioral are worth the 5–10 basis points, especially if you don't need those behavioral guardrails.

I must ask, however: If you're concerned about those basis points, have you considered buying both VEA (Vanguard Developed Markets) plus VWO (Vanguard Emerging Markets) instead of VXUS?

In addition to saving you almost two basis points annually, it has the following two advantages:

1. It would allow you to potentially shift some of your VWO allocation into tax-advantaged accounts if that later becomes advantageous. VWO is relatively tax inefficient compared to VEA and VTI.
2. It would allow you to tax-loss-harvest emerging markets separately from developed markets.

[NiceUnparticularMan]

I agree that what are really extremely minor tax efficiency issues can sometimes be the tail wagging the dog.

In fact, I sometimes am reminded of "hypermilers" who go to extremes to maximize the fuel efficiency of their cars and car driving practices. People can get obsessive about it, and in fact some hypermiling practices are actually quite dangerous.

Of course it makes sense to consider fuel efficiency as one factor among many when choosing a car, or determining your car driving practices. But not every single thing you could conceivably do to try marginally improve your fuel efficiency is actually going to be worth it, and I feel much the same way about tax efficiency.

So yeah, if the "car you want to drive" in your taxable account is VT, maybe because you like its "safety features" and so on, then you should feel free to do so, notwithstanding the fact you have not "hypermiled" your tax efficiency that way. Including because of course it is already very tax efficient anyway.

[steve r]

viewtopic.php?t=370309

While there is no foreign tax credit with VT, you are only taxed on the net dividends after foreign taxes. The dividends reported on the 1099 are equal to the dividends received.

When foreign taxes are reported for something like VXUS, the 1099 reports gross dividends.

Others on that thread confirmed this.

[steve r]

Deleted question.

[ThePrince]

I agree that what are really extremely minor tax efficiency issues can sometimes be the tail wagging the dog.

In fact, I sometimes am reminded of "hypermilers" who go to extremes to maximize the fuel efficiency of their cars and car driving practices. People can get obsessive about it, and in fact some hypermiling practices are actually quite dangerous.

Of course it makes sense to consider fuel efficiency as one factor among many when choosing a car, or determining your car driving practices. But not every single thing you could conceivably do to try marginally improve your fuel efficiency is actually going to be worth it, and I feel much the same way about tax efficiency.

So yeah, if the "car you want to drive" in your taxable account is VT, maybe because you like its "safety features" and so on, then you should feel free to do so, notwithstanding the fact you have not "hypermiled" your tax efficiency that way. Including because of course it is already very tax efficient anyway.

Solid analogy.

[drumboy256]

People who use VXUS to take a foreign tax credit have way to much time on their hands. Kids' UTMA's are holding VT because its a solid choice for any age.

[muffins14]

People who use VXUS to take a foreign tax credit have way to much time on their hands. Kids' UTMA's are holding VT because its a solid choice for any age.

It takes approximately 1 minute per quarter to rebalance

[drumboy256]

People who use VXUS to take a foreign tax credit have way to much time on their hands. Kids' UTMA's are holding VT because its a solid choice for any age.

It takes approximately 1 minute per quarter to rebalance

My point is not that it takes 1 minute per quarter to rebalance--- more the fact that you're looking for tax credits in a taxable account that you can take advantage of because "reasons....".

[VTI]

People who use VXUS to take a foreign tax credit have way to much time on their hands. Kids' UTMA's are holding VT because its a solid choice for any age.

It takes approximately 1 minute per quarter to rebalance

I can’t speak for you or for anyone else, but I suspect people decline your approach for the very same reason you decline to split your ex-US holdings into developed markets and emerging markets.

[muffins14]

People who use VXUS to take a foreign tax credit have way to much time on their hands. Kids' UTMA's are holding VT because its a solid choice for any age.

It takes approximately 1 minute per quarter to rebalance

I can’t speak for you or for anyone else, but I suspect people decline your approach for the very same reason you decline to split your ex-US holdings into developed markets and emerging markets.

I don’t think the foreign tax credit is different when the fund is developed vs emerging markets separately vs combined

[VTI]

People who use VXUS to take a foreign tax credit have way to much time on their hands. Kids' UTMA's are holding VT because its a solid choice for any age.

It takes approximately 1 minute per quarter to rebalance

I can’t speak for you or for anyone else, but I suspect people decline your approach for the very same reason you decline to split your ex-US holdings into developed markets and emerging markets.

I don’t think the foreign tax credit is different when the fund is developed vs emerging markets separately vs combined

You are correct. However, by splitting your international holdings into developed and emerging markets, you gain the following benefits:

1. You save expenses. In your case, you could save almost two basis points annually.
2. You could potentially shift some of your emerging markets allocation into tax-advantaged accounts if that later becomes advantageous. (Emerging markets funds are relatively tax inefficient compared to domestic or developed markets funds.)
3. You could to tax-loss-harvest emerging markets separately from developed markets.

[Makefile]

Agreed. Remember that you can take foreign taxes as a credit or deduction. Total World is like being forced to take a deduction, but actually better, since you don't have to itemize and it doesn't count in AGI.

[Ketawa]

People who use VXUS to take a foreign tax credit have way to much time on their hands. Kids' UTMA's are holding VT because its a solid choice for any age.

It takes approximately 1 minute per quarter to rebalance

I can’t speak for you or for anyone else, but I suspect people decline your approach for the very same reason you decline to split your ex-US holdings into developed markets and emerging markets.

I don’t think the foreign tax credit is different when the fund is developed vs emerging markets separately vs combined

Not the foreign tax credit, but the overall tax efficiency comparing developed markets vs emerging markets. Emerging markets have higher dividends and higher percentages of non-qualified dividends. You also might have more opportunities for tax loss harvesting if you split them up.

Dividend Yield % according to Morningstar
2.8% for developed markets (VTMGX), https://www.morningstar.com/funds/xnas/vtmgx/portfolio
3.2% for emerging markets (VEMAX), https://www.morningstar.com/funds/xnas/vemax/portfolio

2021 Qualified Dividend Income %, https://investor.vanguard.com/investor- ... ncome-2021
72% for developed markets (VTMGX)
38% for emerging markets (VEMAX)

At 15% QDI tax rate and 22% marginal tax rate, the tax drag is 47.5 bp for developed markets vs 61.9 bp for emerging markets, or a total of 14 bp. The potential savings would be higher with a higher marginal tax rate. It's also higher if you account for higher expected returns of emerging markets and paying LTCG taxes. Combining the funds into VTIAX doesn't save anything on the ER.

As you say, this is just 1 minute of rebalancing once a quarter and less added work vs the decision to use VT vs VTI/VXUS because you're already computing the foreign tax credit and filing a tax return with dividend income, so why don't people do it more often?

[asset_chaos]

As a total world investor, I certainly preferred it when the tax credit flowed through, but as it amounts to some hundreds of dollars per million dollars invested, I do think some posters make it more of a bogeyman than it really is. But maybe the lack of the credit doesn't bother me too much because I invested in total world when the expense ratio was 45 basis points. The total ownership cost has reduced enough that now the credit and er are roughly the same size, making the credit lack more noticable.

I'm happy to acknowledge that if you have a sufficiently large amount to invest, that the credit cost could become large enough to outweigh the simplicity of total world and make it worthwhile to break the investment into multiple index funds. How large an amount that might be depends on the value the investor places on investing simplicity. As I am not quite that large an investor yet, I will stick with the simplicity of total world.

[Dry-Drink]

People who use VXUS to take a foreign tax credit have way to much time on their hands. Kids' UTMA's are holding VT because its a solid choice for any age.

It takes approximately 1 minute per quarter to rebalance

Idk how you all rebalance but it takes me way longer: Plug things into my spreadsheet, figure out what is low/isn't, finding tax lots that make sense to sell, etc.

But I will admit I haven't found they've ever hit my rebalancing bands any ways so the overall time spent rebalancing has been zero for me so far.

At 15% QDI tax rate and 22% marginal tax rate, the tax drag is 47.5 bp for developed markets vs 61.9 bp for emerging markets, or a total of 14 bp. The potential savings would be higher with a higher marginal tax rate.

The net savings wouldn't be the 14 bps of tax efficiency between VEA and VWO though, it's the tax efficiency difference between VXUS and VEA (closer to 3 bps).

[/b]

You also might have more opportunities for tax loss harvesting if you split them up.

VXUS will behave very close to VEA so not much of a TLH benefit to splitting from VEA falling much more than VWO (since VXUS will also have fallen by just a bit less than VEA). But there is a much bigger TLH benefit to splitting from VWO falling much more than VEA (a situation the splitter can really make use of that the VXUS investor could not). However, you don't get to double-dip: Whatever TLH benefits exist from splitting can only be obtained if VWO is in taxable, so you don't get the previous tax efficiency benefits from asset location.

[muffins14]

As you say, this is just 1 minute of rebalancing once a quarter and less added work vs the decision to use VT vs VTI/VXUS because you're already computing the foreign tax credit and filing a tax return with dividend income, so why don't people do it more often?

Everyone has a threshold for their trade off in savings vs simplicity.

I do hold some VWO in my Roth and 401k and more developed in my taxable accounts because of the tax reasons related to dividends that you cite

[dboeger1]

Assuming we're strictly talking about taxable accounts based on the topic of the foreign tax credit, I think it's less a matter of acceptability and more that people just want to make the optimal choices up-front to avoid having to sell down the line and trigger taxable events or continue to pay unnecessary ongoing costs. I've actually owned VTWAX in taxable for quite some time, but I'm actually in the process of converting it all to bonds as part of an intentional shift in AA, and my plan is to put future investments in VTI+VXUS. I actually tried VTI+VXUS in the past and hated the transactional experience of ETFs when compared to mutual funds, but that was actually before VTWAX became ineligible for the foreign tax credit, and missing out on it has bugged me ever since. I mostly agree with you about the acceptability of the cost for smaller amounts, but for hundreds of thousands of dollars that I expect to compound over decades, it just doesn't make too much sense to lock oneself into paying extra. In tax-advantaged accounts, you can at least change your mind without cost, but not in taxable.

That's totally fair, actually. No one has to agree that VT/VTWAX's simplicity and potential behavioral are worth the 5–10 basis points, especially if you don't need those behavioral guardrails.

I must ask, however: If you're concerned about those basis points, have you considered buying both VEA (Vanguard Developed Markets) plus VWO (Vanguard Emerging Markets) instead of VXUS?

In addition to saving you almost two basis points annually, it has the following two advantages:

1. It would allow you to potentially shift some of your VWO allocation into tax-advantaged accounts if that later becomes advantageous. VWO is relatively tax inefficient compared to VEA and VTI.
2. It would allow you to tax-loss-harvest emerging markets separately from developed markets.

I didn't actually know about those advantages to VEA+VWO. I guess my answer would be that yes, I would consider them, but I would probably not go that route for a number of reasons. In my mind, the decision to go VTI+VXUS vs. VT is fairly trivial to implement, and gives access to a fairly straightforward tax-saving benefit. Splitting up ex-US beyond that gets into more complicated rebalancing, tax filing, feeling to need to shift asset location to squeeze out an extra basis point here and there, etc. I generally don't practice TLH or optimal tax location for behavioral reasons and also because I really don't want a portfolio filled with similar-but-not-equivalent funds that I can't understand at a glance. I'd prefer to retire long before reaching the level of assets required to make those trade-offs worth it for me.

In defense of VT though, I think one really valuable benefit is having a super-simple portfolio to pass on as part of an estate plan. I know neither my wife nor most of my extended family are really knowledgeable about investments at all, and I suspect I'd have a much easier time convincing them to follow Boglehead practices by handing off a dead-simple 1 or 2 fund portfolio with a one-page document explaining the position, as opposed to some crazy sliced-and-diced super-optimized portfolio that shaves off a few basis points. They likely wouldn't understand such a thing and end up with a financial advisor charging 2% AUM, lol. While VT can never replicate the exact behavior of legal structures such as trusts, wills, insurance, etc., I think funds like VT are a relatively cheap way to make such transitions as smooth as possible. That's probably the single biggest reason I may end up just buying back into VT/VTWAX once I'm done converting what I have to bonds.

[hiddenpower]

Because VT/VTWAX contain less than 50% international stocks, those funds are not eligible for the foreign tax credit (FTC).

For eligible funds like the VXUS/VTIAX (Vanguard Total International Stock), the FTC effectively refunds the taxes you paid to foreign governments on dividends. Uncle Sam taxes you at the gross pre-foreign-tax earnings, and then you are credited back the foreign taxes you paid. This prevents double taxation.

However, all is not lost for VT/VTWAX. Yes, the FTC is not available, but Uncle Sam taxes your lower net post-foreign-tax earnings. No, this foreign tax deduction is not as good, but it’s rarely mentioned during public handwringing about the lack of foreign tax credit.

Ultimately, the difference between the two approaches depends on your individual tax rate. However, I would be stunned if the difference ever exceeds 10 basis points annually, and it’s almost certainly less than that.

I would argue that $5–10 per $10,000 is an acceptable price to pay for the simplicity and behavioral advantages of owning a single, “non-tinkerable” fund.

This is a fascinating distinction that never gets mentioned. I assumed VT resulted in double taxation, but the fact it only reports the income net of foreign tax is quite interesting.

I came across this old thread as I’m am evaluating VT vs slice and dicing.

So it seems despite the loss of FTC, VT is preferable if the foreign tax rate is less than your tax bracket in the US? Do we know what the rate is for the foreign dividends?

I presume VT would change to report the total amount and issue the FTC if international became more than 50%.

Another argument for slicing the fund is china A shares. I just the holdings of VT and these are now included. Moreover it has a higher QDI than the sum of the parts for VXUS + VTI

[Northern Flicker]

The foreign tax is levied on the full dividend. The US tax avoided because of that would have applied only to the portion of the dividend that was paid as foreign tax. The latter is much smaller.

The difference in cost between VT and VTI+VXUS will depend on current and future federal tax brackets.

[hiddenpower]

The foreign tax is levied on the full dividend. The US tax avoided because of that would have applied only to the portion of the dividend that was paid as foreign tax. The latter is much smaller.

The difference in cost between VT and VTI+VXUS will depend on current and future federal tax brackets.

If I’m understanding this thread correctly, you will come out ahead with VT if your effective tax rate is greater than the foreign rate. Can we infer what that is? If the account is large, this seems like a win especially since the FTC ultimately gets a discount rate applied at the 20k limit

[Northern Flicker]

The foreign tax is levied on the full dividend. The US tax avoided because of that would have applied only to the portion of the dividend that was paid as foreign tax. The latter is much smaller.

The difference in cost between VT and VTI+VXUS will depend on current and future federal tax brackets.

If I’m understanding this thread correctly, you will come out ahead with VT if your effective tax rate is greater than the foreign rate.

That is not correct. You pay the foreign taxes out the portion of the dividend generated by foreign holdings whether or not you get the credit when you file your taxes. Holding VT in a taxable account is equivalent to holding VTI+VXUS in the same proportion as VT in a taxable account, and then not bothering to claim the foreign tax credit when you file your taxes. The foreign taxes are paid on your behalf out of the foreign dividends earned whether you hold VT or VTI+VXUS.

Your tax bracket is a consideration when deciding whether to hold the asset in a taxable account or tax-qualified account, which is a different question.

[hiddenpower]

The foreign tax is levied on the full dividend. The US tax avoided because of that would have applied only to the portion of the dividend that was paid as foreign tax. The latter is much smaller.

The difference in cost between VT and VTI+VXUS will depend on current and future federal tax brackets.

If I’m understanding this thread correctly, you will come out ahead with VT if your effective tax rate is greater than the foreign rate.

That is not correct. You pay the foreign taxes out the portion of the dividend generated by foreign holdings whether or not you get the credit when you file your taxes. Holding VT in a taxable account is equivalent to holding VTI+VXUS in the same proportion as VT in a taxable account, and then not bothering to claim the foreign tax credit when you file your taxes. The foreign taxes are paid on your behalf out of the foreign dividends earned whether you hold VT or VTI+VXUS.

Your tax bracket is a consideration when deciding whether to hold the asset in a taxable account or tax-qualified account, which is a different question.

Then this post is incorrect? It implies VG emits the dividend net of foreign whereas VXUS doesn’t. There should be some written evidence of this out there

[hiddenpower]

Evidence indicating the dividend is “net of foreign withholding tax”: https://personal.vanguard.com/funds/rep ... 2210187651

Therefore VT is not resulting in “double taxation” as often inferred

[international001]

Not the foreign tax credit, but the overall tax efficiency comparing developed markets vs emerging markets. Emerging markets have higher dividends and higher percentages of non-qualified dividends. You also might have more opportunities for tax loss harvesting if you split them up.

Dividend Yield % according to Morningstar
2.8% for developed markets (VTMGX), https://www.morningstar.com/funds/xnas/vtmgx/portfolio
3.2% for emerging markets (VEMAX), https://www.morningstar.com/funds/xnas/vemax/portfolio

2021 Qualified Dividend Income %, https://investor.vanguard.com/investor- ... ncome-2021
72% for developed markets (VTMGX)
38% for emerging markets (VEMAX)

At 15% QDI tax rate and 22% marginal tax rate, the tax drag is 47.5 bp for developed markets vs 61.9 bp for emerging markets, or a total of 14 bp. The potential savings would be higher with a higher marginal tax rate. It's also higher if you account for higher expected returns of emerging markets and paying LTCG taxes. Combining the funds into VTIAX doesn't save anything on the ER.

As you say, this is just 1 minute of rebalancing once a quarter and less added work vs the decision to use VT vs VTI/VXUS because you're already computing the foreign tax credit and filing a tax return with dividend income, so why don't people do it more often?

If you have to file 1116, computations get more complicated. Qualified dividends (may) reduce your available credit.
That's also something to keep in mind.

[Northern Flicker]

Evidence indicating the dividend is “net of foreign withholding tax”: https://personal.vanguard.com/funds/rep ... 2210187651

Therefore VT is not resulting in “double taxation” as often inferred

Were you planning to quote the relevant text or cite the relevant page number?

[hiddenpower]

Evidence indicating the dividend is “net of foreign withholding tax”: https://personal.vanguard.com/funds/rep ... 2210187651

Therefore VT is not resulting in “double taxation” as often inferred

Were you planning to quite the relevant text or cite the relevant page number?

Page 81, subtext: “net of foreign withholding tax”.

Neither VT or VXUS get the withheld tax distributed, but at end of year VT will not include the withheld tax in the total dividend amount. So you will US tax on the net of withheld amount. VXUS on the other hand will report the dividends with the withheld amount added back in. And from there, you will claim a credit.

So it seems like it comes down to your effective tax rate. With 6.6% foreign tax withholding, that effective rate for breakeven is around 25%. Thus, if living in CA or NY, VT is superior for accumulators in high brackets where their overall dividend rate will be ~30% afaict.

[Northern Flicker]

Agreed. That would make VT more tax efficient in many states that tax income.

[FoundingFather]

I love the fact that VTI is standing up for VT. I guess it's similar to how siblings will fight constantly, but instantly defend the other when an outsider attacks.

Back to the actual point, this makes me like VT even more than I did before.

Founding Father

[international001]

Page 81, subtext: “net of foreign withholding tax”.

Neither VT or VXUS get the withheld tax distributed, but at end of year VT will not include the withheld tax in the total dividend amount. So you will US tax on the net of withheld amount. VXUS on the other hand will report the dividends with the withheld amount added back in. And from there, you will claim a credit.

So it seems like it comes down to your effective tax rate. With 6.6% foreign tax withholding, that effective rate for breakeven is around 25%. Thus, if living in CA or NY, VT is superior for accumulators in high brackets where their overall dividend rate will be ~30% afaict.

Can you explain the math? Are you assuming all dividends are not qualified and taxed at the regular income bracket.
Assume 6.6% foreign tax witholding and 30% tax bracket, $100 in dividends

With VXUS, 1099-DIV says $100. You get $93.4 in dividends, you pay $30 to the IRS and you get $6.6 back in FTC. So your profit is $70
With VT, 1099-DIV says $93.4. You get $93.4 in dividends, you pay $28.02 (0.3*$93.4) to the IRS, and no FTC. So your net profit is $65.38 ($93.4-$28.02)

(not sure about VT, I just own VTIAX/VXUS)

Where is my math wrong?

[LeoB]

Evidence indicating the dividend is “net of foreign withholding tax”: https://personal.vanguard.com/funds/rep ... 2210187651

Therefore VT is not resulting in “double taxation” as often inferred

If you lookup the annual report for VXUS, I believe it also contains this subtext indicating the dividend is “net of foreign withholding tax.”

[grabiner]

Evidence indicating the dividend is “net of foreign withholding tax”: https://personal.vanguard.com/funds/rep ... 2210187651

Therefore VT is not resulting in “double taxation” as often inferred

Were you planning to quite the relevant text or cite the relevant page number?

Page 81, subtext: “net of foreign withholding tax”.

Neither VT or VXUS get the withheld tax distributed, but at end of year VT will not include the withheld tax in the total dividend amount. So you will US tax on the net of withheld amount. VXUS on the other hand will report the dividends with the withheld amount added back in. And from there, you will claim a credit.

So it seems like it comes down to your effective tax rate. With 6.6% foreign tax withholding, that effective rate for breakeven is around 25%. Thus, if living in CA or NY, VT is superior for accumulators in high brackets where their overall dividend rate will be ~30% afaict.

This is not correct. The only amount for which you get a deduction is the foreign tax paid, and it's better to get a credit of 100% of that amount than a deduction of an equal amount. The deduction would only be better if you would not get to take most of the foreign tax credit because of credit limitations.

For example, suppose that you have a fund which receives $10,000 in foreign dividends with $1000 withheld as foreign tax. If the fund is not eligible for the foreign tax credit, you pay tax on $9000 of dividends, which would be $2250 at a 25% marginal tax rate. If the fund is eligible, you pay tax on $10,000 of dividends but get a $1000 credit, which would be $2500-1000=$1500 at a 25% marginal tax rate.

The fact that the dividend is "net of foreign withholding tax" deals with how the dividend is reported. If a fund has a share price of $100 per share, receives dividends of $3 per share, and withholds 30 cents for foreign tax so that only $2.70 is paid to the shareholders, the fund will report a yield of 2.70%, not 3.00%. However, as in the example above, investors may pay tax on the full 3.00% yield but then get to take the foreign tax credit.

[hiddenpower]

Evidence indicating the dividend is “net of foreign withholding tax”: https://personal.vanguard.com/funds/rep ... 2210187651

Therefore VT is not resulting in “double taxation” as often inferred

Were you planning to quite the relevant text or cite the relevant page number?

Page 81, subtext: “net of foreign withholding tax”.

Neither VT or VXUS get the withheld tax distributed, but at end of year VT will not include the withheld tax in the total dividend amount. So you will US tax on the net of withheld amount. VXUS on the other hand will report the dividends with the withheld amount added back in. And from there, you will claim a credit.

So it seems like it comes down to your effective tax rate. With 6.6% foreign tax withholding, that effective rate for breakeven is around 25%. Thus, if living in CA or NY, VT is superior for accumulators in high brackets where their overall dividend rate will be ~30% afaict.

This is not correct. The only amount for which you get a deduction is the foreign tax paid, and it's better to get a credit of 100% of that amount than a deduction of an equal amount. The deduction would only be better if you would not get to take most of the foreign tax credit because of credit limitations.

For example, suppose that you have a fund which receives $10,000 in foreign dividends with $1000 withheld as foreign tax. If the fund is not eligible for the foreign tax credit, you pay tax on $9000 of dividends, which would be $2250 at a 25% marginal tax rate. If the fund is eligible, you pay tax on $10,000 of dividends but get a $1000 credit, which would be $2500-1000=$1500 at a 25% marginal tax rate.

The fact that the dividend is "net of foreign withholding tax" deals with how the dividend is reported. If a fund has a share price of $100 per share, receives dividends of $3 per share, and withholds 30 cents for foreign tax so that only $2.70 is paid to the shareholders, the fund will report a yield of 2.70%, not 3.00%. However, as in the example above, investors may pay tax on the full 3.00% yield but then get to take the foreign tax credit.

Your'e right. Thanks for clearing that up. So in essence, you can end up pay double tax in some sense?

For example with VT, the dividend doesn't include the withheld amount but you would pay US tax again on the same dollar that faced foreign tax and got withheld.

And in the case of VXUS, if you can't claim the full credit, you're paying tax inclusive with the withheld amount added back in to the dividend.

Is there some sort of breakeven where VT makes more sense than VTI / VXUS? It seems like VT for some reason has more QDI. However looking at the withheld dividends in the annual report for VT, I'm seeing .4% withheld on the

38,419,000/(710,979,000+38,419,000) implies 5.12% total dividends of the fund is withheld. With a 40% allocation to international, that puts the lost withholding on the international side at 12.8% (5.12%/.4).

[grabiner]

Is there some sort of breakeven where VT makes more sense than VTI / VXUS? It seems like VT for some reason has more QDI.

I wouldn't expect much of a difference. VTI was 94% qualified last year, VXUS was 74% qualified, and thus a 40/60 split would be 86% qualified; VT was 87%.

38,419,000/(710,979,000+38,419,000) implies 5.12% total dividends of the fund is withheld. With a 40% allocation to international, that puts the lost withholding on the international side at 12.8% (5.12%/.4).

It's less than this; while 40% of the stock in VT is foreign, more than 40% of the dividend is foreign because foreign stocks have higher dividend yields. VXUS, which had 100% foreign income, had 8.52% of its dividends withheld last year, and VT should have about the same percentage of its foreign dividends withheld.

[international001]

For example, suppose that you have a fund which receives $10,000 in foreign dividends with $1000 withheld as foreign tax. If the fund is not eligible for the foreign tax credit, you pay tax on $9000 of dividends, which would be $2250 at a 25% marginal tax rate. If the fund is eligible, you pay tax on $10,000 of dividends but get a $1000 credit, which would be $2500-1000=$1500 at a 25% marginal tax rate.

The fact that the dividend is "net of foreign withholding tax" deals with how the dividend is reported. If a fund has a share price of $100 per share, receives dividends of $3 per share, and withholds 30 cents for foreign tax so that only $2.70 is paid to the shareholders, the fund will report a yield of 2.70%, not 3.00%. However, as in the example above, investors may pay tax on the full 3.00% yield but then get to take the foreign tax credit.

Finally somebody doing the math.

If you think VT can be more advantageous that VXUS+VTI in any circumstances, please show an example.

[hiddenpower]

For example, suppose that you have a fund which receives $10,000 in foreign dividends with $1000 withheld as foreign tax. If the fund is not eligible for the foreign tax credit, you pay tax on $9000 of dividends, which would be $2250 at a 25% marginal tax rate. If the fund is eligible, you pay tax on $10,000 of dividends but get a $1000 credit, which would be $2500-1000=$1500 at a 25% marginal tax rate.

The fact that the dividend is "net of foreign withholding tax" deals with how the dividend is reported. If a fund has a share price of $100 per share, receives dividends of $3 per share, and withholds 30 cents for foreign tax so that only $2.70 is paid to the shareholders, the fund will report a yield of 2.70%, not 3.00%. However, as in the example above, investors may pay tax on the full 3.00% yield but then get to take the foreign tax credit.

Finally somebody doing the math.

If you think VT can be more advantageous that VXUS+VTI in any circumstances, please show an example.

in the case of lower div yields, higher qualified dividends, or being unable to claim the ftc.

But yes, grabiner is right.

With 3% foreign, and 2% international dividends. Assuming an 8% withholding on international, amounting to .24% dividends lost on a 3% international return. amounting to .096 (.08 * 3 * .4) implicit expense ratio.

Honestly tempted to say screw it for the simplicity.

[donaldfair71]

For example, suppose that you have a fund which receives $10,000 in foreign dividends with $1000 withheld as foreign tax. If the fund is not eligible for the foreign tax credit, you pay tax on $9000 of dividends, which would be $2250 at a 25% marginal tax rate. If the fund is eligible, you pay tax on $10,000 of dividends but get a $1000 credit, which would be $2500-1000=$1500 at a 25% marginal tax rate.

The fact that the dividend is "net of foreign withholding tax" deals with how the dividend is reported. If a fund has a share price of $100 per share, receives dividends of $3 per share, and withholds 30 cents for foreign tax so that only $2.70 is paid to the shareholders, the fund will report a yield of 2.70%, not 3.00%. However, as in the example above, investors may pay tax on the full 3.00% yield but then get to take the foreign tax credit.

Finally somebody doing the math.

If you think VT can be more advantageous that VXUS+VTI in any circumstances, please show an example.

in the case of lower div yields, higher qualified dividends, or being unable to claim the ftc.

But yes, grabiner is right.

With 3% foreign, and 2% international dividends. Assuming an 8% withholding on international, amounting to .24% dividends lost on a 3% international return. amounting to .096 (.08 * 3 * .4) implicit expense ratio.

Honestly tempted to say screw it for the simplicity.

Is that on top of the stated ER of the fund itself?

[grabiner]

With 3% foreign, and 2% international dividends. Assuming an 8% withholding on international, amounting to .24% dividends lost on a 3% international return. amounting to .096 (.08 * 3 * .4) implicit expense ratio.

Is that on top of the stated ER of the fund itself?

Yes, taxes are always a cost on top of the expense ratio. If Fund B saves 0.20% in taxes over Fund A but has 0.20% higher expenses, then Fund B has no advantage for you.

[donaldfair71]

With 3% foreign, and 2% international dividends. Assuming an 8% withholding on international, amounting to .24% dividends lost on a 3% international return. amounting to .096 (.08 * 3 * .4) implicit expense ratio.

Is that on top of the stated ER of the fund itself?

Yes, taxes are always a cost on top of the expense ratio. If Fund B saves 0.20% in taxes over Fund A but has 0.20% higher expenses, then Fund B has no advantage for you.

Correct, I just didn't go through the thread and figure out if any part of the equation above included the ER or whether that was all tax-cost.

[VanGar+Goyle]

Evidence indicating the dividend is “net of foreign withholding tax”: https://personal.vanguard.com/funds/rep ... 2210187651

Therefore VT is not resulting in “double taxation” as often inferred

1 Dividends are net of foreign withholding taxes of $38,419,000.

Vanguard Total International Stock Index Fund also has that footnote.
1 Dividends are net of foreign withholding taxes of $961,843,000.

So I guess that they do not pay foreign tax and give you the money that was paid in foreign tax.

[hiddenpower]

Evidence indicating the dividend is “net of foreign withholding tax”: https://personal.vanguard.com/funds/rep ... 2210187651

Therefore VT is not resulting in “double taxation” as often inferred

1 Dividends are net of foreign withholding taxes of $38,419,000.

Vanguard Total International Stock Index Fund also has that footnote.
1 Dividends are net of foreign withholding taxes of $961,843,000.

So I guess that they do not pay foreign tax and give you the money that was paid in foreign tax.

I was wrong up above regarding double taxation, since it seems you basically are, you're just not getting taxed on the withheld amount.

As for total international, I would have thought it reports the total dividend year end

[bmstrong]

For example, suppose that you have a fund which receives $10,000 in foreign dividends with $1000 withheld as foreign tax. If the fund is not eligible for the foreign tax credit, you pay tax on $9000 of dividends, which would be $2250 at a 25% marginal tax rate. If the fund is eligible, you pay tax on $10,000 of dividends but get a $1000 credit, which would be $2500-1000=$1500 at a 25% marginal tax rate.

The fact that the dividend is "net of foreign withholding tax" deals with how the dividend is reported. If a fund has a share price of $100 per share, receives dividends of $3 per share, and withholds 30 cents for foreign tax so that only $2.70 is paid to the shareholders, the fund will report a yield of 2.70%, not 3.00%. However, as in the example above, investors may pay tax on the full 3.00% yield but then get to take the foreign tax credit.

Finally somebody doing the math.

If you think VT can be more advantageous that VXUS+VTI in any circumstances, please show an example.

in the case of lower div yields, higher qualified dividends, or being unable to claim the ftc.

But yes, grabiner is right.

With 3% foreign, and 2% international dividends. Assuming an 8% withholding on international, amounting to .24% dividends lost on a 3% international return. amounting to .096 (.08 * 3 * .4) implicit expense ratio.

Honestly tempted to say screw it for the simplicity.

This is what I'm struggling with now. For years I had a misguided bias to capture the foreign tax credit in my brokerage. I dropped 30k and spilt equally into VTI+VXUS. Let the dividends reinvest. I'm up in VTI, down in VXUS. That's the game you play. In actuality, the foreign tax credit doesn't really amount to much.

I'm pretty sure I would have been much happier just dropping the whole into VT, let the market sort it out, and move on. The simplicity is just incredibly attractive, as I age. I'm on chapter 10 of The Uncertainty Solution by Jennings. It's on behavioral, and I'm like, yep, that was me. And that...

I could collapse both and eat the loss and the gain...

[hiddenpower]

For example, suppose that you have a fund which receives $10,000 in foreign dividends with $1000 withheld as foreign tax. If the fund is not eligible for the foreign tax credit, you pay tax on $9000 of dividends, which would be $2250 at a 25% marginal tax rate. If the fund is eligible, you pay tax on $10,000 of dividends but get a $1000 credit, which would be $2500-1000=$1500 at a 25% marginal tax rate.

The fact that the dividend is "net of foreign withholding tax" deals with how the dividend is reported. If a fund has a share price of $100 per share, receives dividends of $3 per share, and withholds 30 cents for foreign tax so that only $2.70 is paid to the shareholders, the fund will report a yield of 2.70%, not 3.00%. However, as in the example above, investors may pay tax on the full 3.00% yield but then get to take the foreign tax credit.

Finally somebody doing the math.

If you think VT can be more advantageous that VXUS+VTI in any circumstances, please show an example.

in the case of lower div yields, higher qualified dividends, or being unable to claim the ftc.

But yes, grabiner is right.

With 3% foreign, and 2% international dividends. Assuming an 8% withholding on international, amounting to .24% dividends lost on a 3% international return. amounting to .096 (.08 * 3 * .4) implicit expense ratio.

Honestly tempted to say screw it for the simplicity.

This is what I'm struggling with now. For years I had a misguided bias to capture the foreign tax credit in my brokerage. I dropped 30k and spilt equally into VTI+VXUS. Let the dividends reinvest. I'm up in VTI, down in VXUS. That's the game you play. In actuality, the foreign tax credit doesn't really amount to much.

I'm pretty sure I would have been much happier just dropping the whole into VT, let the market sort it out, and move on. The simplicity is just incredibly attractive, as I age.

I could collapse both and eat the loss and the gain...

FWIW I decided to do a split with VTI, VEA and VWO for maximal TLH abilities and so I have optionality to shift things around in the future. VT is alluring but I’d rather not pay tax twice.

[international001]

Has somebody analyazed how much worth is VEA/VWO split for TLH purposes

Unless you micro-time manage your portfolio, you typically sell stocks when there is a big market crunh. And both to seem to go hand in hand.

https://www.portfoliovisualizer.com/bac ... ion3_3=100

[hiddenpower]

Emerging is supposed to be uncorrelated.

I decided the one extra ETF is worth it to me for the .5bp saving . No but actually for the optionality to sin a bit.

[muffins14]

Has somebody analyazed how much worth is VEA/VWO split for TLH purposes

Unless you micro-time manage your portfolio, you typically sell stocks when there is a big market crunh. And both to seem to go hand in hand.

https://www.portfoliovisualizer.com/bac ... ion3_3=100

Probably not enough benefit to make you retire a year earlier.

[hiddenpower]

Has somebody analyazed how much worth is VEA/VWO split for TLH purposes

Unless you micro-time manage your portfolio, you typically sell stocks when there is a big market crunh. And both to seem to go hand in hand.

https://www.portfoliovisualizer.com/bac ... ion3_3=100

Probably not enough benefit to make you retire a year earlier.

Yeah it won't make a big difference. If you have any regular short term gains (like a trading account or active sub-strategy) then it's a nice to have. Or if you decide to go equal on emerging and developed one day, having the split already is nicer than muddying VXUS with an emerging fund on top.

[White Coat Investor]

Ha ha. Classic Bogleheads thread. Arguing for 50 posts over something that only matters a few basis points.

[hiddenpower]

Ha ha. Classic Bogleheads thread. Arguing for 50 posts over something that only matters a few basis points.

16bps (FTC) matters. That's what I decided in the end. Might as well go with avantis for that.