International stock fund placement - FTC vs. QDI

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OverseasBH
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International stock fund placement - FTC vs. QDI

Post by OverseasBH »

Has anyone looked deeply into where to place their international stock fund, in taxable or tax-deferred?

The bad of international stock funds is that they provide somewhat less than 100% QDI. VTIAX for example was only 73.73% QDI in 2022.

The good is that they pay foreign taxes and although these are added to your dividends, provide for a tax credit on your US return.

Unfortunately, form 1116 only allows a tax credit for foreign taxes essentially in the same relation as your foreign income is to your US income. So often you cannot take the whole credit and have to carry it over, often for some years.

I have lived with this for decades but have never done an in-depth analysis to determine if it is better to house international stock funds in taxable or tax-deferred accounts like IRAs. Is anyone aware of such a study?
zero_coupon
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Re: International stock fund placement - FTC vs. QDI

Post by zero_coupon »

Check out the following:

https://www.physicianonfire.com/international-stock/

He concludes placing international in tax-advantaged is best for most people.
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OverseasBH
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Re: International stock fund placement - FTC vs. QDI

Post by OverseasBH »

zero_coupon wrote: Fri Jan 20, 2023 10:54 pm Check out the following:

https://www.physicianonfire.com/international-stock/

He concludes placing international in tax-advantaged is best for most people.
Thanks for the link.

The trouble with international equity funds is that you may not be able to take all of the foreign tax credit due despite 100% of the foreign taxes paid being added to your US income.

Looking at the Emerging Markets Stock Index VEMAX fund for 2022, it was 23.86% QDI, so 76.14% of the dividends, including the foreign taxes paid, will be taxed at your higher marginal rate. A low QDI percent is consistent year to year. What is not consistent is how much of this year's foreign taxes paid that you can take as a credit, as it depends on the ratio of this year's foreign to domestic income.

As the ability to use all the new foreign tax credits may swing back and forth year to year, the lesser QDI percentages may be the controlling factor and so, as you say, international stock funds are better placed in tax deferred, all things being equal.

I thought I would quickly test that theory. Say you have an international equity fund that paid $10,000 in dividends for the year (inclusive of foreign taxes paid), of which 25% is QDI, and foreign taxes paid were $1200. Your QDI tax rate is 15% and ordinary income tax marginal rate is 22%.

In taxable, this fund would have been taxed as follows: ($2500 *15%) + ($7500 *22%) =$2025 - $1200 (if 100% of tax credit allowed) = $825 tax due. So having this in taxable is worse.

However, maybe the comparison should be against a similar domestic equity fund, with 100% QDI. In that case, you have ($10,000 -$1200 foreign taxes paid) *0.15 = $1,320. With no foreign tax credit to take, the domestic equity fund has a higher tax due.

So it is very dependent on the applicable tax rates and the ability to take the full foreign tax credit.
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Re: International stock fund placement - FTC vs. QDI

Post by Dry-Drink »

I find the generally-higher dividend rate combined with the generally-lower QDI of International is enough of a tax drag for my bracket (22%) that the FTC doesn’t make up for it. So tax-advantaged it is for me.

You might find it’s the opposite for you so you could compute it for your situation.
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Re: International stock fund placement - FTC vs. QDI

Post by Doc »

OverseasBH wrote: Sun Jan 22, 2023 8:34 am The trouble with international equity funds is that you may not be able to take all of the foreign tax credit due despite 100% of the foreign taxes paid being added to your US income.
Yep. In some cases you have to carry them over to future years. And that carry over period expires and the credit may disappear forever.

And you are still paying the foreign tax. It gets deducted from your dividends.

For this reason I put my foreign equity funds in tax advantaged accounts when possible.
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Re: International stock fund placement - FTC vs. QDI

Post by grabiner »

OverseasBH wrote: Sun Jan 22, 2023 8:34 am
zero_coupon wrote: Fri Jan 20, 2023 10:54 pm Check out the following:

https://www.physicianonfire.com/international-stock/

He concludes placing international in tax-advantaged is best for most people.
Thanks for the link.

The trouble with international equity funds is that you may not be able to take all of the foreign tax credit due despite 100% of the foreign taxes paid being added to your US income.
This is only likely if you have a very low income, or a huge international portfolio.

A typical foreign tax withholding rate is 8%. Thus your credit is limited to approximately 8% of your total taxable income (it may be slightly more, depending on how your deductions are apportioned between US and foreign income). If you are in a moderate tax bracket, your federal tax will be more than 8% of your taxable income.

If you have more than $20,000 in foreign qualified dividends, then you have to multiply the qualified dividends by 15/37 in computing your foreign taxable income (20/37 if you pay 20% tax on qualified dividends). But to reach this level as an investor, you would need about a million dollars in taxable foreign stock, assuming a 3% yield and 2/3 of the dividends qualified. It isn't common to have that large a taxable portfolio in a moderate tax bracket.

You must also make the adjustment if you are in the 32% or higher federal tax bracket, but in that high a tax bracket, you should be paying enough tax to get the full credit even with the adjustment.
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Re: International stock fund placement - FTC vs. QDI

Post by OverseasBH »

grabiner wrote: Sun Jan 22, 2023 9:02 pm
OverseasBH wrote: Sun Jan 22, 2023 8:34 am
zero_coupon wrote: Fri Jan 20, 2023 10:54 pm Check out the following:

https://www.physicianonfire.com/international-stock/

He concludes placing international in tax-advantaged is best for most people.
Thanks for the link.

The trouble with international equity funds is that you may not be able to take all of the foreign tax credit due despite 100% of the foreign taxes paid being added to your US income.
This is only likely if you have a very low income, or a huge international portfolio.

A typical foreign tax withholding rate is 8%. Thus your credit is limited to approximately 8% of your total taxable income (it may be slightly more, depending on how your deductions are apportioned between US and foreign income). If you are in a moderate tax bracket, your federal tax will be more than 8% of your taxable income.
Yes, I calculated for 2022 that VEMAX (EM Index) was 9.2% foreign taxes paid, VFWAX (All World Ex-US) was 8.9%, VTMGX (Developed Mkts) was 6.5%, and VTIAX (Total Intl Stock Index) was 8.5%. So hovering around your 8%.

The foreign tax credit one can take is the ratio of your foreign taxable income to total taxable income applied to your total tax liability. Your foreign income may be slightly higher in this ratio due to the way that deductions are calculated against it but then you must have sufficient foreign taxes paid to utilize if this foreign to total income ratio is more than the 8%. That is where the FTC carryforward comes into play, which i would think anyone who has filled out form 1116 over years has had to deal with.

With that said, having a carryforward means you are behind and have not been able to use all the credit for foreign taxes paid. While having foreign taxes paid added to one's income, not being able to take the full credit for foreign taxes paid, and getting less than 100% QDI is not optimal, it could be that the sum of these three is actually better after tax than a domestic equity fund without foreign taxes paid and 100% QDI, even if the dividend rates were equivalent, because tax credits have a much larger impact than income items. However, as the answer could change from year to year, perhaps it is safer to leave international stock funds in tax deferred.
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Re: International stock fund placement - FTC vs. QDI

Post by shess »

zero_coupon wrote: Fri Jan 20, 2023 10:54 pm Check out the following:

https://www.physicianonfire.com/international-stock/

He concludes placing international in tax-advantaged is best for most people.
Add to this that if your tax rate falls in retirement, the credit is effectively worth less. But replacing the position would require realizing gains.

[Well, unless your international is different than my international, there won't be all that many gains to worry about, but still.]
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Re: International stock fund placement - FTC vs. QDI

Post by livesoft »

zero_coupon wrote: Fri Jan 20, 2023 10:54 pm Check out the following:

https://www.physicianonfire.com/international-stock/

He concludes placing international in tax-advantaged is best for most people.
How can this be? Since more than 40% of tax return filers don't pay income taxes and some pay minimal taxes, and most are not physicians, I don't see how this can be true. :twisted: Ha! Ha! When I use VEA in my low tax bracket, the IRS pays me money to have it in taxable. Yep, the tax-cost for me is actually negative!

Nevertheless, I have international funds in taxable, tax-deferred, and Roth accounts.
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Re: International stock fund placement - FTC vs. QDI

Post by zero_coupon »

livesoft wrote: Mon Jan 23, 2023 1:35 am When I use VEA in my low tax bracket, the IRS pays me money to have it in taxable. Yep, the tax-cost for me is actually negative!
I assume you mean that the FTC erases any taxes resulting from the VEA dividends, plus some additional tax. Does VXUS have a negative tax cost for you too?

Separately, is FTC is a refundable credit? That is, would IRS send a refund if one's entire tax bill, plus some, were erased by FTC?
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Re: International stock fund placement - FTC vs. QDI

Post by livesoft »

zero_coupon wrote: Mon Jan 23, 2023 9:43 amI assume you mean that the FTC erases any taxes resulting from the VEA dividends, plus some additional tax. Does VXUS have a negative tax cost for you too?

Separately, is FTC is a refundable credit? That is, would IRS send a refund if one's entire tax bill, plus some, were erased by FTC?
VXUS: No, does not have negative. Years ago, I used VSS for small-caps and made sure VSS was in tax-advantaged.

FTC is not refundable. One must have a tax liability in order to get the credit. Get a tax liability by making a Roth conversion if that's your only way to use the FTC.
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Re: International stock fund placement - FTC vs. QDI

Post by alluringreality »

A few years ago I made a taxable comparison for my considerations based around the first link below. I ended up going with developed stocks in taxable for the tendency towards more qualified dividends than total international, and I put emerging in tax-advantaged. I'm not sure how something like the portfolio from the second link, where the intent was to limit taxable dividends with international growth, would have worked for my considerations at the time.
viewtopic.php?t=242137
viewtopic.php?p=7059219#p7059219
Last edited by alluringreality on Mon Jan 23, 2023 12:19 pm, edited 2 times in total.
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Re: International stock fund placement - FTC vs. QDI

Post by HootingSloth »

When I looked into this, I found that, at least in my circumstances, it was a bit difficult to calculate precisely, that it may change from year-to-year, and that the net difference was unlikely to be more than a few basis points. I concluded from this that I should worry about other things instead.
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Re: International stock fund placement - FTC vs. QDI

Post by grabiner »

livesoft wrote: Mon Jan 23, 2023 1:35 am
zero_coupon wrote: Fri Jan 20, 2023 10:54 pm Check out the following:

https://www.physicianonfire.com/international-stock/

He concludes placing international in tax-advantaged is best for most people.
How can this be? Since more than 40% of tax return filers don't pay income taxes and some pay minimal taxes, and most are not physicians, I don't see how this can be true. :twisted: Ha! Ha! When I use VEA in my low tax bracket, the IRS pays me money to have it in taxable. Yep, the tax-cost for me is actually negative!

Nevertheless, I have international funds in taxable, tax-deferred, and Roth accounts.
However, most people who have to make this decision do pay high taxes. Most investors with low taxes have almost all of their investments in IRAs and 401(k)s. (This isn't always the case; some retirees have moderately high income but much of it is in Roth accounts and qualified stock dividends.)
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Re: International stock fund placement - FTC vs. QDI

Post by OverseasBH »

Does anyone have insight as to why the VTWAX (Total World Stock Index) fund, which currently consists of 41% international stock (59% US), does not show any foreign taxes paid for 2022?

All the other funds holding international equities show up in the just-released "2022 Foreign tax credit information for eligible Vanguard funds" document except Total World Stock Index. Cannot account for its omission.
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Re: International stock fund placement - FTC vs. QDI

Post by shess »

OverseasBH wrote: Tue Jan 24, 2023 2:21 am Does anyone have insight as to why the VTWAX (Total World Stock Index) fund, which currently consists of 41% international stock (59% US), does not show any foreign taxes paid for 2022?

All the other funds holding international equities show up in the just-released "2022 Foreign tax credit information for eligible Vanguard funds" document except Total World Stock Index. Cannot account for its omission.
Because the international holdings are less than 50%. It's one reason many recommend holding VTSAX+VTIAX in the appropriate proportion if you have larger holdings in taxable.
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Re: International stock fund placement - FTC vs. QDI

Post by OverseasBH »

shess wrote: Tue Jan 24, 2023 12:05 pm
OverseasBH wrote: Tue Jan 24, 2023 2:21 am Does anyone have insight as to why the VTWAX (Total World Stock Index) fund, which currently consists of 41% international stock (59% US), does not show any foreign taxes paid for 2022?

All the other funds holding international equities show up in the just-released "2022 Foreign tax credit information for eligible Vanguard funds" document except Total World Stock Index. Cannot account for its omission.
Because the international holdings are less than 50%. It's one reason many recommend holding VTSAX+VTIAX in the appropriate proportion if you have larger holdings in taxable.
That is interesting. Could you explain more what 50% has to do with the paying of foreign taxes?

Btw, the STAR fund has around 19% international equities but has always had foreign taxes paid.
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Re: International stock fund placement - FTC vs. QDI

Post by shess »

OverseasBH wrote: Tue Jan 24, 2023 12:45 pm
shess wrote: Tue Jan 24, 2023 12:05 pm
OverseasBH wrote: Tue Jan 24, 2023 2:21 am Does anyone have insight as to why the VTWAX (Total World Stock Index) fund, which currently consists of 41% international stock (59% US), does not show any foreign taxes paid for 2022?

All the other funds holding international equities show up in the just-released "2022 Foreign tax credit information for eligible Vanguard funds" document except Total World Stock Index. Cannot account for its omission.
Because the international holdings are less than 50%. It's one reason many recommend holding VTSAX+VTIAX in the appropriate proportion if you have larger holdings in taxable.
That is interesting. Could you explain more what 50% has to do with the paying of foreign taxes?

Btw, the STAR fund has around 19% international equities but has always had foreign taxes paid.
I think https://www.law.cornell.edu/uscode/text/26/853 (a)(1).

That said, I am not a securities lawyer, or even a lawyer or some other sort. I just understood that there were two broad issues with FTC, that they had to have 50% non-US securities to qualify, and that funds of funds didn't qualify (I think because the inner fund is actually a US corporation, which then leads to the 50% problem). Maybe there are ways to structure things to let the FTC pass through.

[EDIT: Or, maybe funds of funds has changed, because I also see some comments on the web that that's how some funds manage to pass through FTC even with under 50% international. It's been a few years, my memory of that is that I have VEU rather than VXUS because VXUS at the time didn't have FTC because it was a fund of funds. It has since been reconstituted to not have that problem.]
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Re: International stock fund placement - FTC vs. QDI

Post by OverseasBH »

OverseasBH wrote: Tue Jan 24, 2023 12:45 pm
shess wrote: Tue Jan 24, 2023 12:05 pm
OverseasBH wrote: Tue Jan 24, 2023 2:21 am Does anyone have insight as to why the VTWAX (Total World Stock Index) fund, which currently consists of 41% international stock (59% US), does not show any foreign taxes paid for 2022?

All the other funds holding international equities show up in the just-released "2022 Foreign tax credit information for eligible Vanguard funds" document except Total World Stock Index. Cannot account for its omission.
Because the international holdings are less than 50%. It's one reason many recommend holding VTSAX+VTIAX in the appropriate proportion if you have larger holdings in taxable.
That is interesting. Could you explain more what 50% has to do with the paying of foreign taxes?

Btw, the STAR fund has around 19% international equities but has always had foreign taxes paid.
I think I found the applicable wording from the IRS, as follows:
Section 853 allows a RIC that meets certain requirements to make an annual election under which the RIC’s shareholders are treated as if they paid a proportionate share of any foreign tax that was paid by the RIC during the RIC’s taxable year to which the election relates. The election is available to a RIC if: (1) more than 50 percent of the value of its assets, at the close of the taxable year, consists of stock or securities in foreign corporations, and (2) the RIC has complied with the requirements in section 852(a) and § 1.852-1(a) of the Income Tax Regulations. If the RIC makes this election for a taxable year, it forgoes a deduction or credit for foreign taxes. Instead, under section 853(b)(2)(A), the RIC’s shareholders are required to include in their gross income and treat as paid by them their proportionate shares of the foreign taxes and,accordingly, are eligible to claim either a deduction or credit for those foreign taxes in accordance with sections 164 and 901. In addition, each shareholder of an electing RIC, under section 853(b)(2)(B), must treat as gross income from sources without the United States the sum of the shareholder's proportionate share of the foreign taxes and the portion of any dividend paid by the RIC that represents income derived from sources without the United States.
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Re: International stock fund placement - FTC vs. QDI

Post by HootingSloth »

shess wrote: Tue Jan 24, 2023 12:53 pm
OverseasBH wrote: Tue Jan 24, 2023 12:45 pm
shess wrote: Tue Jan 24, 2023 12:05 pm
OverseasBH wrote: Tue Jan 24, 2023 2:21 am Does anyone have insight as to why the VTWAX (Total World Stock Index) fund, which currently consists of 41% international stock (59% US), does not show any foreign taxes paid for 2022?

All the other funds holding international equities show up in the just-released "2022 Foreign tax credit information for eligible Vanguard funds" document except Total World Stock Index. Cannot account for its omission.
Because the international holdings are less than 50%. It's one reason many recommend holding VTSAX+VTIAX in the appropriate proportion if you have larger holdings in taxable.
That is interesting. Could you explain more what 50% has to do with the paying of foreign taxes?

Btw, the STAR fund has around 19% international equities but has always had foreign taxes paid.
I think https://www.law.cornell.edu/uscode/text/26/853 (a)(1).

That said, I am not a securities lawyer, or even a lawyer or some other sort. I just understood that there were two broad issues with FTC, that they had to have 50% non-US securities to qualify, and that funds of funds didn't qualify (I think because the inner fund is actually a US corporation, which then leads to the 50% problem). Maybe there are ways to structure things to let the FTC pass through.

[EDIT: Or, maybe funds of funds has changed, because I also see some comments on the web that that's how some funds manage to pass through FTC even with under 50% international. It's been a few years, my memory of that is that I have VEU rather than VXUS because VXUS at the time didn't have FTC because it was a fund of funds. It has since been reconstituted to not have that problem.]
I think this is basically correct (with your edit). VTWAX's foreign holdings are held in the form of direct investments in individual foreign corporations, such as Nestle SA or Taiwan Semiconductor Manufacturing Co. Ltd. Because VTWAX holds less than 50%, by value, in assets that produce foreign income, it is ineligible to elect to pass foreign income taxes paid through to its investors. In contrast, the STAR fund holds things like Vanguard International Value Fund or Vanguard International Growth Fund Investor Shares. The underlying funds hold more than 50% in international assets, and so are eligible to (and do) elect to pass through foreign income taxes to their investors, including the STAR Fund. Because these passed-through foreign income taxes are coming from a RIC (rather than an individual foreign corporation), they can in turn be passed through to investors in the STAR Fund.

This is why you also see other Vanguard fund-of-funds, like the lifecycle funds, on the list of funds passing through foreign income taxes--they hold VTIAX (which elects to pass through foreign income taxes) rather than directly holding individual foreign corporations.
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Re: International stock fund placement - FTC vs. QDI

Post by OverseasBH »

grabiner wrote: Sun Jan 22, 2023 9:02 pm
OverseasBH wrote: Sun Jan 22, 2023 8:34 am
zero_coupon wrote: Fri Jan 20, 2023 10:54 pm Check out the following:

https://www.physicianonfire.com/international-stock/

He concludes placing international in tax-advantaged is best for most people.
Thanks for the link.

The trouble with international equity funds is that you may not be able to take all of the foreign tax credit due despite 100% of the foreign taxes paid being added to your US income.
This is only likely if you have a very low income, or a huge international portfolio.

A typical foreign tax withholding rate is 8%. Thus your credit is limited to approximately 8% of your total taxable income (it may be slightly more, depending on how your deductions are apportioned between US and foreign income). If you are in a moderate tax bracket, your federal tax will be more than 8% of your taxable income.

If you have more than $20,000 in foreign qualified dividends, then you have to multiply the qualified dividends by 15/37 in computing your foreign taxable income (20/37 if you pay 20% tax on qualified dividends). But to reach this level as an investor, you would need about a million dollars in taxable foreign stock, assuming a 3% yield and 2/3 of the dividends qualified. It isn't common to have that large a taxable portfolio in a moderate tax bracket.

You must also make the adjustment if you are in the 32% or higher federal tax bracket, but in that high a tax bracket, you should be paying enough tax to get the full credit even with the adjustment.
I am curious now, if you read my prior post above about the lack of FTC pass-through for VTWAX, would this lead you to consider that fund one that should even more so be held in tax-deferred?
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Re: International stock fund placement - FTC vs. QDI

Post by OverseasBH »

HootingSloth wrote: Tue Jan 24, 2023 1:15 pm
shess wrote: Tue Jan 24, 2023 12:53 pm
OverseasBH wrote: Tue Jan 24, 2023 12:45 pm
shess wrote: Tue Jan 24, 2023 12:05 pm
OverseasBH wrote: Tue Jan 24, 2023 2:21 am Does anyone have insight as to why the VTWAX (Total World Stock Index) fund, which currently consists of 41% international stock (59% US), does not show any foreign taxes paid for 2022?

All the other funds holding international equities show up in the just-released "2022 Foreign tax credit information for eligible Vanguard funds" document except Total World Stock Index. Cannot account for its omission.
Because the international holdings are less than 50%. It's one reason many recommend holding VTSAX+VTIAX in the appropriate proportion if you have larger holdings in taxable.
That is interesting. Could you explain more what 50% has to do with the paying of foreign taxes?

Btw, the STAR fund has around 19% international equities but has always had foreign taxes paid.
I think https://www.law.cornell.edu/uscode/text/26/853 (a)(1).

That said, I am not a securities lawyer, or even a lawyer or some other sort. I just understood that there were two broad issues with FTC, that they had to have 50% non-US securities to qualify, and that funds of funds didn't qualify (I think because the inner fund is actually a US corporation, which then leads to the 50% problem). Maybe there are ways to structure things to let the FTC pass through.

[EDIT: Or, maybe funds of funds has changed, because I also see some comments on the web that that's how some funds manage to pass through FTC even with under 50% international. It's been a few years, my memory of that is that I have VEU rather than VXUS because VXUS at the time didn't have FTC because it was a fund of funds. It has since been reconstituted to not have that problem.]
I think this is basically correct (with your edit). VTWAX's foreign holdings are held in the form of direct investments in individual foreign corporations, such as Nestle SA or Taiwan Semiconductor Manufacturing Co. Ltd. Because VTWAX holds less than 50%, by value, in assets that produce foreign income, it is ineligible to elect to pass foreign income taxes paid through to its investors. In contrast, the STAR fund holds things like Vanguard International Value Fund or Vanguard International Growth Fund Investor Shares. The underlying funds hold more than 50% in international assets, and so are eligible to (and do) elect to pass through foreign income taxes to their investors, including the STAR Fund. Because these passed-through foreign income taxes are coming from a RIC (rather than an individual foreign corporation), they can in turn be passed through to investors in the STAR Fund.

This is why you also see other Vanguard fund-of-funds, like the lifecycle funds, on the list of funds passing through foreign income taxes--they hold VTIAX (which elects to pass through foreign income taxes) rather than directly holding individual foreign corporations.
Thanks, good explanation. I wonder why VG does not include this on their fund pages, it would certainly be one consideration of at least where to hold a fund.
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Re: International stock fund placement - FTC vs. QDI

Post by grabiner »

OverseasBH wrote: Tue Jan 24, 2023 1:19 pm I am curious now, if you read my prior post above about the lack of FTC pass-through for VTWAX, would this lead you to consider that fund one that should even more so be held in tax-deferred?
It is a relatively minor cost. If the fund is slightly less than half foreign, then the lost foreign tax credit is less than half the lost credit on a total international fund. And it's even less than that, because you don't pay dividend tax on the amount withheld. So the loss from not having the foreign credit would probably be about 0.10%, compared to holding separate US and foreign funds.
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Re: International stock fund placement - FTC vs. QDI

Post by shess »

OverseasBH wrote: Tue Jan 24, 2023 1:19 pm I am curious now, if you read my prior post above about the lack of FTC pass-through for VTWAX, would this lead you to consider that fund one that should even more so be held in tax-deferred?
If you have $100k of space in taxable and $100k of space in tax-deferred, the obvious solution would be to hold VTSAX in taxable and VTIAX in tax-deferred. I mean, you can tweak the proportions to 60/40 or whatever, my point being that two positions is two positions, might as well arrange them in a pleasing way.
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Re: International stock fund placement - FTC vs. QDI

Post by OverseasBH »

shess wrote: Wed Jan 25, 2023 12:13 pm
OverseasBH wrote: Tue Jan 24, 2023 1:19 pm I am curious now, if you read my prior post above about the lack of FTC pass-through for VTWAX, would this lead you to consider that fund one that should even more so be held in tax-deferred?
If you have $100k of space in taxable and $100k of space in tax-deferred, the obvious solution would be to hold VTSAX in taxable and VTIAX in tax-deferred. I mean, you can tweak the proportions to 60/40 or whatever, my point being that two positions is two positions, might as well arrange them in a pleasing way.
My query involved Total World (VTWAX), which is 59% domestic and 41% international equity. Because it does not pass through the foreign taxes paid to allow taking FTC (and does therefore not include those foreign taxes paid as dividends paid), where should it go, taxable or tax-deferred?

Fyi, It has 86.92% QDI, in between VTSAX and VTIAX.
shess
Posts: 1949
Joined: Wed May 17, 2017 12:02 am

Re: International stock fund placement - FTC vs. QDI

Post by shess »

OverseasBH wrote: Wed Jan 25, 2023 2:26 pm
shess wrote: Wed Jan 25, 2023 12:13 pm
OverseasBH wrote: Tue Jan 24, 2023 1:19 pm I am curious now, if you read my prior post above about the lack of FTC pass-through for VTWAX, would this lead you to consider that fund one that should even more so be held in tax-deferred?
If you have $100k of space in taxable and $100k of space in tax-deferred, the obvious solution would be to hold VTSAX in taxable and VTIAX in tax-deferred. I mean, you can tweak the proportions to 60/40 or whatever, my point being that two positions is two positions, might as well arrange them in a pleasing way.
My query involved Total World (VTWAX), which is 59% domestic and 41% international equity. Because it does not pass through the foreign taxes paid to allow taking FTC (and does therefore not include those foreign taxes paid as dividends paid), where should it go, taxable or tax-deferred?

Fyi, It has 86.92% QDI, in between VTSAX and VTIAX.
Yeah, and I'm saying that if you're wondering if you should post it in taxable or tax-deferred, that changes the question, because you generally can't put it in tax-deferred without moving something else to taxable to compensate.
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OverseasBH
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Re: International stock fund placement - FTC vs. QDI

Post by OverseasBH »

shess wrote: Wed Jan 25, 2023 6:02 pm
OverseasBH wrote: Wed Jan 25, 2023 2:26 pm
shess wrote: Wed Jan 25, 2023 12:13 pm
OverseasBH wrote: Tue Jan 24, 2023 1:19 pm I am curious now, if you read my prior post above about the lack of FTC pass-through for VTWAX, would this lead you to consider that fund one that should even more so be held in tax-deferred?
If you have $100k of space in taxable and $100k of space in tax-deferred, the obvious solution would be to hold VTSAX in taxable and VTIAX in tax-deferred. I mean, you can tweak the proportions to 60/40 or whatever, my point being that two positions is two positions, might as well arrange them in a pleasing way.
My query involved Total World (VTWAX), which is 59% domestic and 41% international equity. Because it does not pass through the foreign taxes paid to allow taking FTC (and does therefore not include those foreign taxes paid as dividends paid), where should it go, taxable or tax-deferred?

Fyi, It has 86.92% QDI, in between VTSAX and VTIAX.
Yeah, and I'm saying that if you're wondering if you should post it in taxable or tax-deferred, that changes the question, because you generally can't put it in tax-deferred without moving something else to taxable to compensate.
Using your hypothetical of $100k space in both taxable and tax-deferred but you are one who favors the minimum 20% international equities. So you have $100k in VTSAX and $100k in VTWAX. Where does each fund go and why?
shess
Posts: 1949
Joined: Wed May 17, 2017 12:02 am

Re: International stock fund placement - FTC vs. QDI

Post by shess »

OverseasBH wrote: Thu Jan 26, 2023 5:26 am Using your hypothetical of $100k space in both taxable and tax-deferred but you are one who favors the minimum 20% international equities. So you have $100k in VTSAX and $100k in VTWAX. Where does each fund go and why?
My personal preference would be to put all VTSAX (US Total Market) into taxable first, and then only put VTWAX (Intl Total Market) into taxable if there was not room for it in tax-deferred. So in this case, taxable would be VTSAX and tax-deferred would be a mix. To me, while the FTC is a worthwhile tweak if I am going to have international in taxable anyhow, I find it annoying and not good compensation for having higher dividends in the first place (and, well, intl has had lower returns, too). I guess I mean I find the FTC better to have than not have, but I will not seek it out.

Now, I might prefer intl in taxable over REIT, and almost certainly over fixed income. And if my tax-deferred space were mostly Roth, that might change my mind a bit, depending on my feeling about total returns of intl versus domestic going forward. Like if I wanted 33% in domestic, intl, and fixed-income, and had $100k Roth, tIRA, and taxable, I could see sorting that as Roth=domestic equity, taxable=intl equity, tIRA=fixed income. But I might also elect to flip intl into Roth to optimize for not need for FTC and higher long-term gains (in hopes of harvesting a stepped up basis by giving to charity or passing to heirs).

https://www.bogleheads.org/wiki/Tax-eff ... _placement touches on some of this in the options given in the assignment section.
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