PSA: Schwab International ETFs: 1099-DIV revisions coming [Updated]

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Chip
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PSA: Schwab International ETFs: 1099-DIV revisions coming [Updated]

Post by Chip » Mon Feb 12, 2018 4:08 pm

Updated with new info. See new post.

I just received notification from Schwab that they are reclassifying some of the investment income from the Schwab International Equity ETF (SCHF) and the Schwab Fundamental International Large Company ETF (FNDF). The reclassification is from dividend income to return of capital (ROC).

For FNDF $0.0267/share is now ROC. For SCHF $0.0835/share is now ROC. Those numbers represent 3.7841% and 10.4256% of the total dividend distributions of the respective funds. There was no ROC for either fund on my original 1099-DIV from Fidelity.

I don't know if the reclassification will come from ordinary dividends, qualified dividends, or both. The notification was mute on that point and I can't find anything on Schwab's web site. Not that I can EVER find anything useful on that web site. I also don't know if this might also somehow affect foreign tax paid calculations. Obviously they can't change the actual payments made but I suppose they could be using accrual accounting.

So if you own those funds in taxable, wait for a revised 1099-DIV from your broker before filing your tax return. These are the only two Schwab international ETFs that I own. I suspect there is a chance that other Schwab international ETFs/mutual funds may also be affected.
Last edited by Chip on Sat Apr 07, 2018 6:39 am, edited 1 time in total.

Alan S.
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Re: PSA: Schwab International ETFs: 1099-DIV revisions coming

Post by Alan S. » Mon Feb 12, 2018 8:44 pm

Thanks.
Was their any CG distribution for SCHF?

Chip
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Re: PSA: Schwab International ETFs: 1099-DIV revisions coming

Post by Chip » Tue Feb 13, 2018 6:35 am

Alan S. wrote:
Mon Feb 12, 2018 8:44 pm
Was their any CG distribution for SCHF?
No CG distributions for either fund. As well as none in 2016.

After comparing my current 1099 with this new information it's clear that at least some of the ROC for FNDF will have to come from qualified dividends. The amount of ROC is larger than the non-qualified dividends reported on my original 1099.

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in_reality
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Re: PSA: Schwab International ETFs: 1099-DIV revisions coming

Post by in_reality » Tue Feb 13, 2018 7:15 am

Chip wrote:
Tue Feb 13, 2018 6:35 am
Alan S. wrote:
Mon Feb 12, 2018 8:44 pm
Was their any CG distribution for SCHF?
No CG distributions for either fund. As well as none in 2016.

After comparing my current 1099 with this new information it's clear that at least some of the ROC for FNDF will have to come from qualified dividends. The amount of ROC is larger than the non-qualified dividends reported on my original 1099.
I'm not so sure.

And I'm not so sure you'll see a corrected 1099-DIV.

My SCHF is held at Schwab and I was issued the same notification on 1.2017 for a 12.2016 distribution. I never received a revised 1099-DIV.

OK, so you are at Fidelity and maybe they issued a 1099-DIV earlier than Schwab, so perhaps Fidelity didn't have correct information at that time.

Still, on my 2016 1099-DIV though (received in 2.2017 for the 2016 tax year), there is nothing at all on the form indicating a return of capital anywhere (SCHC, SCHF, FNDC, FNDE, FNDF all issued the name notifications).

The only mention I can find on the 1099 for "return of capital" is:
Return of Capital Payments: Cost basis will be reduced for any return of capital (principal) distributions.

Chip
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Re: PSA: Schwab International ETFs: 1099-DIV revisions coming

Post by Chip » Tue Feb 13, 2018 7:42 am

Return of capital is reported on Line 3 of 1099-DIV, "Nondividend distributions".

I really don't see how there won't be a revised 1099. As you can see from your Schwab letter, the last column is labeled "Amount of net investment income distribution reclassified as Return of Capital or Other Capital Source". That indicates to me that something that was formerly classified as income will now be called ROC. To me that means taxable->nontaxable.

My Fidelity 1099 was issued at the end of January.

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in_reality
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Re: PSA: Schwab International ETFs: 1099-DIV revisions coming

Post by in_reality » Tue Feb 13, 2018 7:46 am

Chip wrote:
Tue Feb 13, 2018 7:42 am
Return of capital is reported on Line 3 of 1099-DIV, "Nondividend distributions".

I really don't see how there won't be a revised 1099. As you can see from your Schwab letter, the last column is labeled "Amount of net investment income distribution reclassified as Return of Capital or Other Capital Source". That indicates to me that something that was formerly classified as income will now be called ROC. To me that means taxable->nontaxable.

My Fidelity 1099 was issued at the end of January.
For 2016, the year I received 5 such notifications, my Line 3 of 1099-DIV Nondividend Distributions is $0.00.

Per Schwab:

https://www.schwabfunds.com/public/file ... -FAQs_.pdf
This notice is not for tax reporting purposes and is being provided only for informational purposes to comply with the requirements
of Section 19(a) of the 1940 Act and does not affect your tax position

This notice is not being provided for tax reporting purposes, and will not affect your 1099 or any
other tax documents you may have received.

Alan S.
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Re: PSA: Schwab International ETFs: 1099-DIV revisions coming

Post by Alan S. » Tue Feb 13, 2018 2:18 pm

If ROC is not reported on the 1099 DIV, and cost basis is not reduced as a result, it appears that a future CG amount is being replaced by an equal current tax bill for dividends that actually are ROC.

If other firms are correcting the 1099 DIV to reduce reported dividends by the ROC amount, that would seem to reflect a different interpretation of the 1940 Act.

Chip
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Re: PSA: Schwab International ETFs: 1099-DIV revisions coming

Post by Chip » Wed Feb 14, 2018 9:24 am

I guess we'll see about revised 1099s in a month or so.
in_reality wrote:
Tue Feb 13, 2018 7:46 am
For 2016, the year I received 5 such notifications, my Line 3 of 1099-DIV Nondividend Distributions is $0.00.

Per Schwab:

https://www.schwabfunds.com/public/file ... -FAQs_.pdf
This notice is not for tax reporting purposes and is being provided only for informational purposes to comply with the requirements
of Section 19(a) of the 1940 Act and does not affect your tax position

This notice is not being provided for tax reporting purposes, and will not affect your 1099 or any other tax documents you may have received.
Further down in the letter you referenced is the following (my emphasis):
This notice is not for tax reporting purposes and is being provided only for informational purposes to comply with the requirements
of Section 19(a) of the 1940 Act and does not affect your tax position. You may receive a Form 1099, if applicable, specifying how the
distributions paid by the fund should be characterized for purposes of reporting the distributions on your tax return (e.g., ordinary income, long-term capital gain or return of capital).
If you have further questions regarding your tax return, please contact your tax adviser.
My interpretation is that they are saying the notice doesn't affect the 1099 because Schwab leaves it up to the broker to issue a revised 1099 when necessary. I also recall getting Section 19(a) notices last year but I don't recall any numbers on them in terms of $/share of reclassified amounts. I don't still have those notices, do you? Are they different from this year's?

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in_reality
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Re: PSA: Schwab International ETFs: 1099-DIV revisions coming

Post by in_reality » Thu Feb 15, 2018 4:08 am

Chip wrote:
Wed Feb 14, 2018 9:24 am
in_reality wrote:
Tue Feb 13, 2018 7:46 am
This notice is not being provided for tax reporting purposes, and will not affect your 1099 or any other tax documents you may have received.
My interpretation is that they are saying the notice doesn't affect the 1099 because Schwab leaves it up to the broker to issue a revised 1099 when necessary. I also recall getting Section 19(a) notices last year but I don't recall any numbers on them in terms of $/share of reclassified amounts. I don't still have those notices, do you? Are they different from this year's?
Well, interpret it how you feel is best.

I am interpreting the statement that it "will not affect your 1099 or any other tax documents you may have received" as meaning there will be no revised 1099.

Plus, I received the exact same notices last year (only differing in stated amounts), and was not issued a revised 1099.

Alan S.
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Re: PSA: Schwab International ETFs: 1099-DIV revisions coming

Post by Alan S. » Thu Feb 15, 2018 12:55 pm

Or perhaps the Schwab Notice is saying that the 19a notice was required whether or not you are getting a 1099 DIV from Schwab. And if the 1099 DIV has been issued by Schwab, the 19a notice will not affect it and you don't have to wait for a corrected 1099 DIV.

Chip
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Re: PSA: Schwab International ETFs: 1099-DIV revisions coming

Post by Chip » Thu Feb 15, 2018 4:12 pm

Alan S. wrote:
Thu Feb 15, 2018 12:55 pm
Or perhaps the Schwab Notice is saying that the 19a notice was required whether or not you are getting a 1099 DIV from Schwab. And if the 1099 DIV has been issued by Schwab, the 19a notice will not affect it and you don't have to wait for a corrected 1099 DIV.
I suppose it's possible, but what about your earlier point about ROC, adjustments to basis, etc.? Are you saying that perhaps Schwab has already made those adjustments to their in-house 1099s (perhaps before issuance), but the other brokers are on their own?

[rant] Schwab does a *#$@-poor job of communicating with the retail customers of its funds. They publish no estimates of dividend distributions, QDI and FTC late in the calendar year and finding historical info is NOT easy. Especially when compared with Vanguard, Fidelity and iShares. This 19a letter fiasco is just one of many complaint I have about their communications. If I didn't have significant capital gains built up I would be really tempted to dump these funds.[/rant]

Alan S.
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Re: PSA: Schwab International ETFs: 1099-DIV revisions coming

Post by Alan S. » Thu Feb 15, 2018 10:38 pm

Chip wrote:
Thu Feb 15, 2018 4:12 pm
Alan S. wrote:
Thu Feb 15, 2018 12:55 pm
Or perhaps the Schwab Notice is saying that the 19a notice was required whether or not you are getting a 1099 DIV from Schwab. And if the 1099 DIV has been issued by Schwab, the 19a notice will not affect it and you don't have to wait for a corrected 1099 DIV.
I suppose it's possible, but what about your earlier point about ROC, adjustments to basis, etc.? Are you saying that perhaps Schwab has already made those adjustments to their in-house 1099s (perhaps before issuance), but the other brokers are on their own?

[rant] Schwab does a *#$@-poor job of communicating with the retail customers of its funds. They publish no estimates of dividend distributions, QDI and FTC late in the calendar year and finding historical info is NOT easy. Especially when compared with Vanguard, Fidelity and iShares. This 19a letter fiasco is just one of many complaint I have about their communications. If I didn't have significant capital gains built up I would be really tempted to dump these funds.[/rant]
I agree with you, as I have spent considerable time attempting to locate the same info, particularly since I just moved International ETF holdings from my IRA to the Schwab One. They tell me that there have been no FTC credits on SCHF or SCHE, but I know that dividends are distributed every Dec, so why no FTC? It's another issue to go with the ROC handling. At this time I have no idea how to interpret the Schwab bulletin re 19a.

Chip
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Re: PSA: Schwab International ETFs: 1099-DIV revisions coming

Post by Chip » Fri Feb 16, 2018 7:45 am

Alan S. wrote:
Thu Feb 15, 2018 10:38 pm
I agree with you, as I have spent considerable time attempting to locate the same info, particularly since I just moved International ETF holdings from my IRA to the Schwab One. They tell me that there have been no FTC credits on SCHF or SCHE, but I know that dividends are distributed every Dec, so why no FTC? It's another issue to go with the ROC handling. At this time I have no idea how to interpret the Schwab bulletin re 19a.
Good grief. Of course there is FTC for SCHF. Here are the numbers per share reported on my Fidelity 1099-DIV, received in late January:

QDI: $0.7418/share
non-QDI: $0.1258/share
FT paid: $0.0668/share
ROC: 0
LTCG: 0

I don't own SCHE so can't give you those numbers.

Chip
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Re: PSA: Schwab International ETFs: 1099-DIV revisions coming

Post by Chip » Fri Feb 16, 2018 7:52 am

As an aside, Blackrock publishes 19a notices as well (https://www.blackrock.com/investing/pro ... 19-notices. It appears that they issue one every time ANY fund makes a distribution. Here's a quote from one:
iShares MSCI Total International Index Fund, Investor A Shares distributed $0.057110000 per share on December 18, 2017. The fund estimates that $0.034305560 per share of this amount would be attributable to return of capital. These amounts are subject to revision and your year-end Form 1099-DIV may differ.
To me that is pretty clear that ROC will be included on their 1099-DIVs, though the exact amounts may change.

ThriftyInvestor
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Re: PSA: Schwab International ETFs: 1099-DIV revisions coming

Post by ThriftyInvestor » Wed Apr 04, 2018 7:03 pm

Return of Capital or Other Capital Source Distribution = Foreign Tax Paid

I have a Schwab taxable account in which I own SCHF. 1/23/2018 received 19(a) notice for first time ever despite owning this fund for years. 1099-Div hardcopy and online copy as of today 4/4/2018 are both dated 1/26/2018, no revisions received, show an adjustment to previously paid distributions increased by exactly the amount of offsetting foreign tax paid.

Analyzing the data:
12/22/2017 sum of SCHF distributions
divided by 12/22/2017 total shares owned before reinvestment
=$0.8008/share matching that reported on notice 19(a).

$0.0835/share notice 19(a) "amount of net investment income distribution reclassified as return of capital or other capital source"
multiplied by 12/22/2017 sum of SCHF distributions
= foreign tax paid reported retrospectively on 1099-DIV 1/26/2018.

I agree that this could have been explained more clearly on Schwab's 19(a) notice.

I am not an accounting or tax professional. If I understand this correctly:

I have reported the augmented but never received adjusted distribution listed on 1099-DIV on my tax return, offset by an equal foreign tax (attributed but never actually paid out of my funds) credit on my tax return. From an actual cash flow, cash basis accounting, the effect of this phantom adjusted augmented distribution and offsetting foreign tax paid is a tax savings of (1-marginal tax rate) x foreign tax paid. For this reason, I keep my foreign funds in taxable accounts. I believe this is equivalent to had I received the equivalent adjusted distribution without any foreign tax, and just paid my marginal tax rate on it, perhaps the rationale for this tax law.

I made no change to my internal record keeping of my SCHF basis for this "return of capital". I could have added to the basis for the augmented but never received adjusted distribution imagining it had been reinvested, then made an equal decrement to my basis for the "return of capital" equal to the attributed but never paid foreign tax imagining a sale of shares to pay that tax, equivalent to net zero change in basis.

Please correct me if I my understanding is wrong.

Chip
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Re: PSA: Schwab International ETFs: 1099-DIV revisions coming

Post by Chip » Thu Apr 05, 2018 3:03 pm

ThriftyInvestor wrote:
Wed Apr 04, 2018 7:03 pm
Analyzing the data:
12/22/2017 sum of SCHF distributions
divided by 12/22/2017 total shares owned before reinvestment
=$0.8008/share matching that reported on notice 19(a).

$0.0835/share notice 19(a) "amount of net investment income distribution reclassified as return of capital or other capital source"
multiplied by 12/22/2017 sum of SCHF distributions
= foreign tax paid reported retrospectively on 1099-DIV 1/26/2018.
Thanks for posting.

My SCHF foreign tax paid numbers don't match yours so foreign tax paid does not equal the ROC on the 19(a) notice. In my case, foreign tax paid is $0.06684/share vs. the $0.0835 ROC.

As mentioned above, I also own FNDF. Foreign tax paid per share for it was $0.05998/share vs. $.0267 ROC.

I didn't reinvest the dividends.

Did I misunderstand your post?

Edit: corrected typo
Last edited by Chip on Sat Apr 07, 2018 6:42 am, edited 1 time in total.

Chip
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Re: PSA: Schwab International ETFs: 1099-DIV revisions coming [Updated]

Post by Chip » Sat Apr 07, 2018 6:40 am

After some significant back and forth with Fidelity (where I own the Schwab ETFs), they notified me yesterday that they will be sending me a revised 1099-DIV in the next few days.

I'll post the numbers here when I receive it.

ThriftyInvestor
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Re: PSA: Schwab International ETFs: 1099-DIV revisions coming

Post by ThriftyInvestor » Sun May 20, 2018 1:28 am

Chip wrote:
Thu Apr 05, 2018 3:03 pm
ThriftyInvestor wrote:
Wed Apr 04, 2018 7:03 pm
Analyzing the data:
12/22/2017 sum of SCHF distributions
divided by 12/22/2017 total shares owned before reinvestment
=$0.8008/share matching that reported on notice 19(a).

$0.0835/share notice 19(a) "amount of net investment income distribution reclassified as return of capital or other capital source"
multiplied by 12/22/2017 sum of SCHF distributions
= foreign tax paid reported retrospectively on 1099-DIV 1/26/2018.
Thanks for posting.

My SCHF foreign tax paid numbers don't match yours so foreign tax paid does not equal the ROC on the 19(a) notice. In my case, foreign tax paid is $0.06684/share vs. the $0.0835 ROC.

As mentioned above, I also own FNDF. Foreign tax paid per share for it was $0.05998/share vs. $.0267 ROC.

I didn't reinvest the dividends.

Did I misunderstand your post?

Edit: corrected typo
My apologies that this was less than clear.
I compared 3 documents:
1. Schwab December 2017 statement.
2. Schwab 1/23/2018 letter for SCHF
....A. "$0.8008 Amount of Net Investment Income Distribution (per share)"
....B. "10.4256% Percentage of Net Investment Income Distribution Reclassified as Return of Capital or Other Capital Source"
....C. "$0.0835 Amount of Net Investment Income Distribution Reclassified as Return of Capital or Other Capital Source (per share)"
3. Schwab 1/26/2018 1099-DIV

Analyzing my statement and 1099-DIV data:
SCHF dividend paid / SCHF shares owned before reinvesting dividend = $0.80079, rounds to A.
SCHF foreign tax paid / SCHF dividend paid = 0.08346, rounds to C.
C. "$0.0835" / A. "$0.8008" = 10.4271%, closely approximates B.

It is difficult to imagine that by coincidence SCHF foreign tax paid / SCHF dividend paid (i.e. portion or percent of dividend paid as foreign tax) = "$0.0835 Amount of Net Investment Income Distribution Reclassified as Return of Capital or Other Capital Source (per share)". This leaves me to wonder if Schwab labelled or defined "$0.0835" incorrectly, as it correlates with the % of dividends paid as foreign taxes, and its unit in that case would not be $/share, but a dimensionless ratio. If instead I multiply $0.0835/share by my shares owned before or after reinvestment, I get a number that exceeds foreign taxes actually paid.

In summary, I find it very hard to believe that my foreign tax paid / dividends paid is coincidentally exactly the ROC/share. It seems to have absolutely nothing to do with the number of shares I own. Either I do not understand the 1/23/2108 letter, or perhaps the name and units of the quantity "$0.0835" is stated incorrectly in the letter.

Chip
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Re: PSA: Schwab International ETFs: 1099-DIV revisions coming

Post by Chip » Sun May 20, 2018 5:13 am

ThriftyInvestor wrote:
Sun May 20, 2018 1:28 am
In summary, I find it very hard to believe that my foreign tax paid / dividends paid is coincidentally exactly the ROC/share. It seems to have absolutely nothing to do with the number of shares I own. Either I do not understand the 1/23/2108 letter, or perhaps the name and units of the quantity "$0.0835" is stated incorrectly in the letter.
Thanks again for posting. Now I understand where you are coming from. I can confirm that doing the calculations with my numbers for SCHF, using your method, produces the same results.

However, it is not repeatable with the data for FNDF. Using your method on the FNDF numbers:

2. Schwab 1/23/2018 letter for FNDF
....A. "$0.7053 Amount of Net Investment Income Distribution (per share)"
....B. "3.7841% Percentage of Net Investment Income Distribution Reclassified as Return of Capital or Other Capital Source"
....C. "$0.0267 Amount of Net Investment Income Distribution Reclassified as Return of Capital or Other Capital Source (per share)"

Analyzing my statement and 1099-DIV data:
FNDF net dividend paid / FNDF shares owned = $0.7053, equals A.
FNDF foreign tax paid / FNDF net dividend paid = 0.08505, nowhere close to C.
"$0.08505" / A. "$0.7053" = 12.06%, nowhere close to B.

So I think this may suggest that the numbers for SCHF are indeed a coincidence. Though I'll admit it's strange to have a coincidence to 3 or 4 decimal places.

After quite a bit more back and forth, Fidelity retracted their offer to provide a revised 1099-DIV. That was despite promising it in a secure message (copied for my files, of course). When I pushed for an explanation they could not (or would not) provide one. This was complicated by not being able to speak directly to their tax department and having to go through a front line rep as an intermediary.

Though it is thoroughly unsatisfying, I think I will have to accept the explanation in the FAQ that in_reality linked to earlier in the thread. That is, that the reclassification is due to differences in shareholder tax accounting vs. GAAP accounting, affecting the latter but not the former.

ThriftyInvestor
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Re: PSA: Schwab International ETFs: 1099-DIV revisions coming [Updated]

Post by ThriftyInvestor » Thu May 24, 2018 11:40 pm

2. Schwab 1/23/2018 letter for FNDF
....A. "$0.7053 Amount of Net Investment Income Distribution (per share)"
....B. "3.7841% Percentage of Net Investment Income Distribution Reclassified as Return of Capital or Other Capital Source"
....C. "$0.0267 Amount of Net Investment Income Distribution Reclassified as Return of Capital or Other Capital Source (per share)"
Try this: (C=$0.0267) / (A=$0.7053) = 3.7856%, closely approximates B.
FNDF foreign tax paid / FNDF net dividend paid = 0.08505, nowhere close to C.
Agreed, although very close to SCHF value for the same ratio, not surprising, as for two foreign developed large equity funds, average foreign tax rate across many countries might be similar if both funds are market weighted. I realize that FNDF is NOT market weighted (weighting is based on fundamental factors, including sales, cash flow and dividends/buybacks.) Perhaps the fundamental factors results in a stock mix not too different than market weighting, or perhaps our foreign brethern all have similar and much lower corporate tax rates than the US all in the 8% range.

Alas, ROC/share for FNDF does not seen to share the same coincidence as SCHF

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