international stock in taxable brokerage or ROTH IRA?

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woodside
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international stock in taxable brokerage or ROTH IRA?

Post by woodside »

I maintained asset allocation with 60 US stocks, 20 international stocks, and 20 US bonds.

The asset allocation has been mirrored among the three accounts (403B, Roth IRA and taxable brokerage). The percentage of the three accounts is approximately 50:25:25 (EDITED)

Due to my tax rate (24% Fed, 10% tax), I keep New York Tax-Exempt BOND in the taxable brokerage rather than the total bond index in the ROTH IRA and 403B.

I am thinking about having only New York Tax-Exempt BOND and US stock index in the taxable brokerage (no international stocks) and increasing the international stocks allocation for the ROTH IRA to maintain the overall asset allocation. It seems

1. It's easier to do the tax loss harvesting with just one fund to consider possible tax wash to avoid possible other identical funds in the ROTH IRA and 403B.
2. There seems more tax drag on the international stocks due to their higher dividend distribution (2-3% Edited) vs 1-2% dividend distribution for US stock.

The only con of this strategy that I know is that I will lose the foreign tax credit if international stocks are not placed in the taxable brokerage account.

Can you guys give some thoughts (or already have thought about it) on placing international stock in taxable brokerage or ROTH IRA and share it with me? This discussion may help me decide how to reallocate the funds among the different accounts.

EDIT:
1. If the foreign tax credit is more than $600 (for married filing jointly) or $300 (for single), one needs to file Form 1116 and it seems straightforward. See the post by grabiner. If one has $20,000 or more of foreign qualified dividend income, then one cannot use the adjustment exception described in the Form 1116 instructions, see livesoft's post.
2. The wiki page https://www.bogleheads.org/wiki/Tax-eff ... _placement may be helpful to make a decision. One doesn't have to follow it exactly as each person's situation may be different.

Thank you.
Last edited by woodside on Sat Dec 10, 2022 1:40 pm, edited 6 times in total.
panhead
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Re: international stock in taxable brokerage or ROTH IRA?

Post by panhead »

woodside wrote: Thu Dec 08, 2022 6:40 am I maintained asset allocation with 60 US stocks, 20 international stocks, and 20 US bonds.

The asset allocation has been mirrored among the three accounts (403B, Roth IRA and taxable brokerage).

Due to my tax rate (24% Fed, 10% tax), I keep New York Tax-Exempt BOND in the taxable brokerage rather than the total bond index in the ROTH IRA and 403B.

I am thinking about having only New York Tax-Exempt BOND and US stock index in the taxable brokerage (no international stocks) and increasing the international stocks allocation for the ROTH IRA to maintain the overall asset allocation. It seems

1. It's easier to do the tax loss harvesting with just one fund to consider possible tax wash to avoid possible other identical funds in the ROTH IRA and 403B.
2. There sees more tax drag on the international stocks due to their higher dividend distribution (4-5%?) vs 1-2% dividend distribution for US stock.

The only con of this strategy that I know is that I will lose the foreign tax credit if international stocks are not placed in the taxable brokerage account.

Can you guys give some thoughts (or already have thought about it) on placing international stock in taxable brokerage or ROTH IRA and share it with me? This discussion may help me decide how to reallocate the funds among the different accounts.

Thank you.
The foreign tax credit has a "cap." I forget what this cap is, but I'm sure someone will chime in or you can google it. Once your investment in foreign funds results in hitting this cap on the credit, I think it's better to move subsequent foreign fund investments into tax advantaged accounts. Since my tax deferred is filled with bonds, I increased my foreign fund investments in my Roth IRA.
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HMSVictory
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Re: international stock in taxable brokerage or ROTH IRA?

Post by HMSVictory »

Bonds in pre-tax.

US and Ex-US stocks in Roth.

Remainer stocks in taxable. If possible, keep all bonds in pre-tax to minimize the growth of your future tax liability.

We have a wiki here on the forum for efficient tax location.
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woodside
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Re: international stock in taxable brokerage or ROTH IRA?

Post by woodside »

panhead wrote: Thu Dec 08, 2022 7:08 am The foreign tax credit has a "cap." I forget what this cap is, but I'm sure someone will chime in or you can google it. Once your investment in foreign funds results in hitting this cap on the credit, I think it's better to move subsequent foreign fund investments into tax-advantaged accounts. Since my tax deferred is filled with bonds, I increased my foreign fund investments in my Roth IRA.
Thanks, Panhead for the foreign tax "cap". I checked that it is $600 for married filing jointly (for my family) or $300 for single. My ex-US in the taxable brokerage is quite small to reach the cap. I also checked my previous tax return and found that "the foreign tax credit" is about 10% of the dividend, which then reduces the tax drag (tax on the dividend is about 15% Fed tax for qualified dividends +10% state tax), and it seems to favor placing the ex-US only in taxable brokerage account rather than in ROTH IRA.
HMSVictory wrote: Thu Dec 08, 2022 7:58 am Bonds in pre-tax.

US and Ex-US stocks in Roth.

Remainer stocks in taxable. If possible, keep all bonds in pre-tax to minimize the growth of your future tax liability.

We have a wiki here on the forum for efficient tax location.
Thanks HMSVictory for the suggestion and also the wiki page. I checked the wiki page https://www.bogleheads.org/wiki/Tax-eff ... le_account, In step 3, it suggests "Step 3: Placing international stock funds in the taxable account". I may need to spend more time reading this wiki page. For right now, it probably makes sense to do as it said unless I reach the foreign tax credit "cap."

Regarding placing the bonds in the 403b first. I need to do more thinking about tax saving and the asymmetric risk for the pre-tax and post-tax accounts. Right now I am doing simple mirroring for the pre-tax account 403B and post-tax account (ROTH and taxable brokerage) to avoid the asymmetric risk (the discussion is here viewtopic.php?t=318512)
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Re: international stock in taxable brokerage or ROTH IRA?

Post by grabiner »

In a high-tax state, it is better to hold US stocks in taxable and international stocks in tax-advantaged accounts. The reason is that international stocks have higher dividends; the US tax cost is offset by the foreign tax credit, but you also pay the high state tax on the dividend. (There are a few states which allow a foreign tax credit on state tax, but NY is not one of them.)
panhead wrote: Thu Dec 08, 2022 7:08 am The foreign tax credit has a "cap." I forget what this cap is, but I'm sure someone will chime in or you can google it. Once your investment in foreign funds results in hitting this cap on the credit, I think it's better to move subsequent foreign fund investments into tax advantaged accounts. Since my tax deferred is filled with bonds, I increased my foreign fund investments in my Roth IRA.
The cap is not a limit on the credit, but a limit on the ability to take the credit without filing Form 1116. Most investors in foreign stock funds will get the full foreign tax back as a credit after filing Form 1116. (I have been filing the form for years, in my moderate federal and high state tax bracket, and the limit for the credit is usually about twice the foreign tax, so I get the full credit.)
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nedsaid
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Re: international stock in taxable brokerage or ROTH IRA?

Post by nedsaid »

grabiner wrote: Fri Dec 09, 2022 10:59 pm In a high-tax state, it is better to hold US stocks in taxable and international stocks in tax-advantaged accounts. The reason is that international stocks have higher dividends; the US tax cost is offset by the foreign tax credit, but you also pay the high state tax on the dividend. (There are a few states which allow a foreign tax credit on state tax, but NY is not one of them.)
panhead wrote: Thu Dec 08, 2022 7:08 am The foreign tax credit has a "cap." I forget what this cap is, but I'm sure someone will chime in or you can google it. Once your investment in foreign funds results in hitting this cap on the credit, I think it's better to move subsequent foreign fund investments into tax advantaged accounts. Since my tax deferred is filled with bonds, I increased my foreign fund investments in my Roth IRA.
The cap is not a limit on the credit, but a limit on the ability to take the credit without filing Form 1116. Most investors in foreign stock funds will get the full foreign tax back as a credit after filing Form 1116. (I have been filing the form for years, in my moderate federal and high state tax bracket, and the limit for the credit is usually about twice the foreign tax, so I get the full credit.)
Wow. This is really good and nuanced advice. Grabiner is one of the very best posters here.

The standard thinking is to have Stock Funds, particularly International Stock Funds, held in taxable accounts as much as you can. The reasoning behind this is lower tax rates for Long Term Capital Gain income and Qualified Dividends. For International Stock Funds, the additional tax benefit is to claim the Foreign Tax Credit.

So you will see people say that your taxable accounts should be Stock heavy and your tax deferred retirement accounts more Bond heavy, because Stocks are considered to be more tax efficient. Bond income is taxed at Ordinary income tax rates and not at the more favorable Long Term Capital Gain rates, though Bond funds can generate minor Capital Gains distributions.

I ask people to take this standard advice and consider their own personal situations. My thought is if you make your retirement accounts too Bond heavy, you will doom your retirement accounts to low returns. A lot depends upon how much you have in taxable accounts to tax deferred retirement accounts. If the bulk of your savings are in tax deferred retirement accounts, my advice would be to invest those accounts for maximum return. If you have both large taxable and large tax deferred accounts, the standard thinking of making taxable accounts Stock heavy and tax deferred accounts more Bond heavy makes a lot more sense.

Grabiner's advice regarding tax efficient placement of asset classes among the different types of accounts in high tax States is nuanced and very good. A good illustration that one needs to think beyond rules of thumb and to think through your investment strategies more thoroughly. Investment advice is not "one size fits all."
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Re: international stock in taxable brokerage or ROTH IRA?

Post by owlgoldfishkangaroo »

nedsaid wrote: Sat Dec 10, 2022 12:14 am
I ask people to take this standard advice and consider their own personal situations. My thought is if you make your retirement accounts too Bond heavy, you will doom your retirement accounts to low returns. A lot depends upon how much you have in taxable accounts to tax deferred retirement accounts. If the bulk of your savings are in tax deferred retirement accounts, my advice would be to invest those accounts for maximum return. If you have both large taxable and large tax deferred accounts, the standard thinking of making taxable accounts Stock heavy and tax deferred accounts more Bond heavy makes a lot more sense.

Grabiner's advice regarding tax efficient placement of asset classes among the different types of accounts in high tax States is nuanced and very good. A good illustration that one needs to think beyond rules of thumb and to think through your investment strategies more thoroughly. Investment advice is not "one size fits all."
Makes sense and agree every situation is unique. However, what about the scenario where you have a much larger taxable account than tax deferred account. You know you won't take money out of the tax deferred account until retirement, and retirement is a ways off. I think in that scenario you may want to hold more stocks in your tax deferred account because you can take more risk. I suppose this would only make sense if you are actually not holding your asset allocation steady when making this adjustment (you take on more stocks). Thoughts?
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Re: international stock in taxable brokerage or ROTH IRA?

Post by tomsense76 »

nedsaid wrote: Sat Dec 10, 2022 12:14 am I ask people to take this standard advice and consider their own personal situations. My thought is if you make your retirement accounts too Bond heavy, you will doom your retirement accounts to low returns. A lot depends upon how much you have in taxable accounts to tax deferred retirement accounts. If the bulk of your savings are in tax deferred retirement accounts, my advice would be to invest those accounts for maximum return. If you have both large taxable and large tax deferred accounts, the standard thinking of making taxable accounts Stock heavy and tax deferred accounts more Bond heavy makes a lot more sense.
This has also been my worry with this bond advice often provided here. In fact when we see folks show up and ask whether they should pay taxes to rebalance (needing to sell in taxable and possibly also buy bonds there), it sounds like a failure mode of this kind of bonds in tax-deferred advice (seen many years after taken). Sure there may have been (usually small) spread in tax that these folks have saved over the years, but paying a larger capital gains at the end may erase that (or possibly be worse). Would be interested to know if anyone has explored this before (maybe a good question for McQ?).

grabiner does a great job of pointing out to us to consider the tax cost of each choice as opposed to just following the standard advice.

With international in particular, there is usually some non-qualified dividends and a foreign tax credit. They often come close to netting out (though one might be slightly bigger than the other). Though this misses the point grabiner clearly articulated, which is the dividend of international stocks is larger.

To OP, it would help to know what percentage of the portfolio is in pre-tax (401k), taxable (brokerage), and tax-free (Roth IRA). For example are they all roughly equal? Or is most of it in pre-tax? Or something else? We can recommend an asset go in one account, but if it won't all fit there will need to be some spillover elsewhere.
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Re: international stock in taxable brokerage or ROTH IRA?

Post by panhead »

nedsaid wrote: Sat Dec 10, 2022 12:14 am
grabiner wrote: Fri Dec 09, 2022 10:59 pm In a high-tax state, it is better to hold US stocks in taxable and international stocks in tax-advantaged accounts. The reason is that international stocks have higher dividends; the US tax cost is offset by the foreign tax credit, but you also pay the high state tax on the dividend. (There are a few states which allow a foreign tax credit on state tax, but NY is not one of them.)
panhead wrote: Thu Dec 08, 2022 7:08 am The foreign tax credit has a "cap." I forget what this cap is, but I'm sure someone will chime in or you can google it. Once your investment in foreign funds results in hitting this cap on the credit, I think it's better to move subsequent foreign fund investments into tax advantaged accounts. Since my tax deferred is filled with bonds, I increased my foreign fund investments in my Roth IRA.
The cap is not a limit on the credit, but a limit on the ability to take the credit without filing Form 1116. Most investors in foreign stock funds will get the full foreign tax back as a credit after filing Form 1116. (I have been filing the form for years, in my moderate federal and high state tax bracket, and the limit for the credit is usually about twice the foreign tax, so I get the full credit.)
Wow. This is really good and nuanced advice. Grabiner is one of the very best posters here.
I couldn't agree more. Thank you grabiner for clarifying my simple understanding of the "cap" on the credit. This helps in my thinking about international fund placement, and certainly helps the OP.

As usual, your advice is is detailed, and very helpful.
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Re: international stock in taxable brokerage or ROTH IRA?

Post by livesoft »

I'll chime in here based on my actual experience.

1. Filing Form 1116 is very easy nowadays. We have had more than $600 FTC for many years now. You should infer that we keep plenty of international funds in taxable.

2. We keep VEA and VEU in taxable. They make a nice tax-loss harvesting pair since they are substantially similar, but not substantially identical.

3. We keep VSS (small-cap foreign) and DGS (small-cap emerging) in Roth IRAs and tax-deferred accounts. This is partly because I run a small-cap and value-tilted portfolio, but also because VEA is extremely tax-efficient for us (it has a negative tax cost in our tax bracket). VEA has 85% qualified dividends while VXUS has 72%, VEU has 76%, and VSS has only 60%. That's the reason to split and put VSS in tax-advantaged for me.

4. There is another "cap" when it comes to the foreign tax credit: If one has $20,000 or more of foreign qualified dividend income, then one cannot use the adjustment exception described in the Form 1116 instructions. We keep our Foreign Qualified Dividends below $20,000 by not keeping all our international funds in taxable.

5. The OP exaggerated the dividend yield of international funds. It looks like VEA will be about 2.7% to 3% yield for 2022.
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Re: international stock in taxable brokerage or ROTH IRA?

Post by nedsaid »

owlgoldfishkangaroo wrote: Sat Dec 10, 2022 2:03 am
nedsaid wrote: Sat Dec 10, 2022 12:14 am
I ask people to take this standard advice and consider their own personal situations. My thought is if you make your retirement accounts too Bond heavy, you will doom your retirement accounts to low returns. A lot depends upon how much you have in taxable accounts to tax deferred retirement accounts. If the bulk of your savings are in tax deferred retirement accounts, my advice would be to invest those accounts for maximum return. If you have both large taxable and large tax deferred accounts, the standard thinking of making taxable accounts Stock heavy and tax deferred accounts more Bond heavy makes a lot more sense.

Grabiner's advice regarding tax efficient placement of asset classes among the different types of accounts in high tax States is nuanced and very good. A good illustration that one needs to think beyond rules of thumb and to think through your investment strategies more thoroughly. Investment advice is not "one size fits all."
Makes sense and agree every situation is unique. However, what about the scenario where you have a much larger taxable account than tax deferred account. You know you won't take money out of the tax deferred account until retirement, and retirement is a ways off. I think in that scenario you may want to hold more stocks in your tax deferred account because you can take more risk. I suppose this would only make sense if you are actually not holding your asset allocation steady when making this adjustment (you take on more stocks). Thoughts?
You really need to think things through. In a situation with a much larger taxable account than the tax deferred account, you definitely could make your taxable account Stock heavy and the tax deferred account Bond heavy. You would need to look at the asset allocation for all your accounts as a whole.

You also want to consider your ordinary income tax bracket, that would determine your capital gains tax rate. Depending upon your ordinary income tax bracket your capital gains rate could be 0%, 15%, or 20%. If one is considering making a big sale of stock in a taxable account, it would be wise to model it in tax software before making the sale. There is a worksheet involved and the calculations are complex. Because so many things interact within the tax code, I would not try a manual calculation.

There are different schools of thought on the tax efficient placement of assets among accounts. For example, Rick Ferri says an investor should allocate all accounts the same. Many different ways to look at this.

Also keep in mind that your emergency funds (FDIC Insured Bank Deposits, Money Market Funds, etc.) will be in your taxable accounts.

Like you, I am reluctant to invest retirement accounts too conservatively, you don't want to doom them to low returns.
In the scenario described above, I would lean towards following the standard Boglehead advice of tax efficient placement of assets over the different types of accounts. That is making taxable accounts Stock heavy and tax deferred accounts Bond heavy.
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Re: international stock in taxable brokerage or ROTH IRA?

Post by woodside »

grabiner wrote: Fri Dec 09, 2022 10:59 pm In a high-tax state, it is better to hold US stocks in taxable and international stocks in tax-advantaged accounts. The reason is that international stocks have higher dividends; the US tax cost is offset by the foreign tax credit, but you also pay the high state tax on the dividend. (There are a few states which allow a foreign tax credit on state tax, but NY is not one of them.)

The cap is not a limit on the credit, but a limit on the ability to take the credit without filing Form 1116. Most investors in foreign stock funds will get the full foreign tax back as a credit after filing Form 1116. (I have been filing the form for years, in my moderate federal and high state tax bracket, and the limit for the credit is usually about twice the foreign tax, so I get the full credit.)
livesoft wrote: Sat Dec 10, 2022 7:41 am
4. There is another "cap" when it comes to the foreign tax credit: If one has $20,000 or more of foreign qualified dividend income, then one cannot use the adjustment exception described in the Form 1116 instructions. We keep our Foreign Qualified Dividends below $20,000 by not keeping all our international funds in taxable.

5. The OP exaggerated the dividend yield of international funds. It looks like VEA will be about 2.7% to 3% yield for 2022.
Thanks grabiner and livesoft for the more detailed information on different types of "cap". I edited the first post to summarize this information. The dividend yield of international funds was based on a rough estimate from 2021 tax return (which is not accurate as I did stock selling/purchase), I also updated the first post with 2-3% for the dividend yield of international funds
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Re: international stock in taxable brokerage or ROTH IRA?

Post by woodside »

tomsense76 wrote: Sat Dec 10, 2022 2:13 am To OP, it would help to know what percentage of the portfolio is in pre-tax (401k), taxable (brokerage), and tax-free (Roth IRA). For example are they all roughly equal? Or is most of it in pre-tax? Or something else? We can recommend an asset go in one account, but if it won't all fit there will need to be some spillover elsewhere.
The percentages for pre-tax (401k), taxable (brokerage), and tax-free (Roth IRA) are 50:25:25, I updated my first post to reflect this.

Right now, the asset allocation is the same 60/20/20 for US stock/ex US stock/bond for all three accounts.

It seems that I can take all ex US stock from ROTH IRA to taxable. After the re-allocation, the asset allocation for ROTH IRA is 80:0:20 and the asset allocation for the taxable is 40:40:20.

I don't need to worry about the capital gain stuff when shuffling the money around. I just lump sum-ed the money in the taxable after I sold my previous apartment early this year, so a lot of tax loss has already been accumulated.
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Re: international stock in taxable brokerage or ROTH IRA?

Post by retired@50 »

woodside wrote: Sat Dec 10, 2022 12:48 pm
tomsense76 wrote: Sat Dec 10, 2022 2:13 am To OP, it would help to know what percentage of the portfolio is in pre-tax (401k), taxable (brokerage), and tax-free (Roth IRA). For example are they all roughly equal? Or is most of it in pre-tax? Or something else? We can recommend an asset go in one account, but if it won't all fit there will need to be some spillover elsewhere.
The percentages for pre-tax (401k), taxable (brokerage), and tax-free (Roth IRA) are 50:25:25, I updated my first post to reflect this.

Right now, the asset allocation is the same 60/20/20 for US stock/ex US stock/bond for all three accounts.

It seems that I can take all ex US stock from ROTH IRA to taxable. After the re-allocation, the asset allocation for ROTH IRA is 80:0:20 and the asset allocation for the taxable is 40:40:20.

I don't need to worry about the capital gain stuff when shuffling the money around. I just lump sum-ed the money in the taxable after I sold my previous apartment early this year, so a lot of tax loss has already been accumulated.
If you're following the tax efficient fund placement guidelines, then all the bonds or bond funds would be in the pre-tax 401k, and the Roth account would be entirely in stock funds, as would the taxable account.

Regards,
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Re: international stock in taxable brokerage or ROTH IRA?

Post by woodside »

retired@50 wrote: Sat Dec 10, 2022 12:52 pm
woodside wrote: Sat Dec 10, 2022 12:48 pm
tomsense76 wrote: Sat Dec 10, 2022 2:13 am To OP, it would help to know what percentage of the portfolio is in pre-tax (401k), taxable (brokerage), and tax-free (Roth IRA). For example are they all roughly equal? Or is most of it in pre-tax? Or something else? We can recommend an asset go in one account, but if it won't all fit there will need to be some spillover elsewhere.
The percentages for pre-tax (401k), taxable (brokerage), and tax-free (Roth IRA) are 50:25:25, I updated my first post to reflect this.

Right now, the asset allocation is the same 60/20/20 for US stock/ex US stock/bond for all three accounts.

It seems that I can take all ex US stock from ROTH IRA to taxable. After the re-allocation, the asset allocation for ROTH IRA is 80:0:20 and the asset allocation for the taxable is 40:40:20.

I don't need to worry about the capital gain stuff when shuffling the money around. I just lump sum-ed the money in the taxable after I sold my previous apartment early this year, so a lot of tax loss has already been accumulated.
If you're following the tax efficient fund placement guidelines, then all the bonds or bond funds would be in the pre-tax 401k, and the Roth account would be entirely in stock funds, as would the taxable account.

Regards,
The bond in my taxable is NY Muni Bond, so there is not much of the tax drag. The bond allocation in my taxable can be used for the future large expense (college tuition etc) when it is needed.

I didn't follow the wiki exactly on placing bonds. There are two reasons: 1. My 403B doesn't offer short-term TIPS bonds so I will use my ROTH IRA to have a short-term TIPS bond. 2. The exact mirroring of the asset allocation between pre-tax and post-tax accounts can hedge me if somehow one of the accounts is better.

The overall bond components are 25% NY Muni BOND (taxable): 25% Short-term TIPS: 50% TIAA traditional (minimum 3% interest rate).
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Re: international stock in taxable brokerage or ROTH IRA?

Post by grabiner »

owlgoldfishkangaroo wrote: Sat Dec 10, 2022 2:03 am However, what about the scenario where you have a much larger taxable account than tax deferred account. You know you won't take money out of the tax deferred account until retirement, and retirement is a ways off. I think in that scenario you may want to hold more stocks in your tax deferred account because you can take more risk. I suppose this would only make sense if you are actually not holding your asset allocation steady when making this adjustment (you take on more stocks). Thoughts?
This is not actually necessary; see Placing cash needs in a tax-advantaged account on the wiki. You can take the same amount of risk whether the stocks are in your taxable or tax-deferred account. If you want to sell bonds but your taxable account is all stock, you can sell stock in your taxable account, then move an equal amount from bonds to stock in your tax-deferred account.
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woodside
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Re: international stock in taxable brokerage or ROTH IRA?

Post by woodside »

grabiner wrote: Sat Dec 10, 2022 3:03 pm
owlgoldfishkangaroo wrote: Sat Dec 10, 2022 2:03 am However, what about the scenario where you have a much larger taxable account than tax deferred account. You know you won't take money out of the tax deferred account until retirement, and retirement is a ways off. I think in that scenario you may want to hold more stocks in your tax deferred account because you can take more risk. I suppose this would only make sense if you are actually not holding your asset allocation steady when making this adjustment (you take on more stocks). Thoughts?
This is not actually necessary; see Placing cash needs in a tax-advantaged account on the wiki. You can take the same amount of risk whether the stocks are in your taxable or tax-deferred account. If you want to sell bonds but your taxable account is all stock, you can sell stock in your taxable account, then move an equal amount from bonds to stock in your tax-deferred account.
This swapping strategy to get the cash when needed is quite brilliant. One question is that for the tax-deferred account, do we need to consider the potential tax rate? For myself, I sometimes think the one dollar in the tax-deferred account is only 0.66 post-tax dollar (with 24% Fed and 10% State tax), though I am not doing this conversion consistently. In your example, if I need $100,000 cash, I will sell $100,000 of stocks in the taxable account and then convert the $100,000/0.66 from bond to stock in the tax-deferred account.

If I have to do the computation more precisely, I probably need to consider any capital gain of selling $100,000 after the tax loss has been exhausted.
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Re: international stock in taxable brokerage or ROTH IRA?

Post by grabiner »

woodside wrote: Sat Dec 10, 2022 6:31 pm
grabiner wrote: Sat Dec 10, 2022 3:03 pm
owlgoldfishkangaroo wrote: Sat Dec 10, 2022 2:03 am However, what about the scenario where you have a much larger taxable account than tax deferred account. You know you won't take money out of the tax deferred account until retirement, and retirement is a ways off. I think in that scenario you may want to hold more stocks in your tax deferred account because you can take more risk. I suppose this would only make sense if you are actually not holding your asset allocation steady when making this adjustment (you take on more stocks). Thoughts?
This is not actually necessary; see Placing cash needs in a tax-advantaged account on the wiki. You can take the same amount of risk whether the stocks are in your taxable or tax-deferred account. If you want to sell bonds but your taxable account is all stock, you can sell stock in your taxable account, then move an equal amount from bonds to stock in your tax-deferred account.
This swapping strategy to get the cash when needed is quite brilliant. One question is that for the tax-deferred account, do we need to consider the potential tax rate? For myself, I sometimes think the one dollar in the tax-deferred account is only 0.66 post-tax dollar (with 24% Fed and 10% State tax), though I am not doing this conversion consistently. In your example, if I need $100,000 cash, I will sell $100,000 of stocks in the taxable account and then convert the $100,000/0.66 from bond to stock in the tax-deferred account.

If I have to do the computation more precisely, I probably need to consider any capital gain of selling $100,000 after the tax loss has been exhausted.
Yes, it makes sense to do this, especially if you have a Roth account; see Tax-adjusted asset allocation on the wiki.

There isn't that much difference between taxable and tax-deferred. At your tax rates, you lose 34% of the gains in your traditional IRA/401(k). (You also lose 34% of the present value, but that is independent of your asset allocation; it is a constant dollar amount.) In your taxable account, you would lose 25% of the gains if the stocks paid no dividends, but you lose more than that over time because the tax loss to dividends compounds.
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Re: international stock in taxable brokerage or ROTH IRA?

Post by woodside »

grabiner wrote: Sat Dec 10, 2022 10:24 pm
woodside wrote: Sat Dec 10, 2022 6:31 pm
grabiner wrote: Sat Dec 10, 2022 3:03 pm
owlgoldfishkangaroo wrote: Sat Dec 10, 2022 2:03 am However, what about the scenario where you have a much larger taxable account than tax deferred account. You know you won't take money out of the tax deferred account until retirement, and retirement is a ways off. I think in that scenario you may want to hold more stocks in your tax deferred account because you can take more risk. I suppose this would only make sense if you are actually not holding your asset allocation steady when making this adjustment (you take on more stocks). Thoughts?
This is not actually necessary; see Placing cash needs in a tax-advantaged account on the wiki. You can take the same amount of risk whether the stocks are in your taxable or tax-deferred account. If you want to sell bonds but your taxable account is all stock, you can sell stock in your taxable account, then move an equal amount from bonds to stock in your tax-deferred account.
This swapping strategy to get the cash when needed is quite brilliant. One question is that for the tax-deferred account, do we need to consider the potential tax rate? For myself, I sometimes think the one dollar in the tax-deferred account is only 0.66 post-tax dollar (with 24% Fed and 10% State tax), though I am not doing this conversion consistently. In your example, if I need $100,000 cash, I will sell $100,000 of stocks in the taxable account and then convert the $100,000/0.66 from bond to stock in the tax-deferred account.

If I have to do the computation more precisely, I probably need to consider any capital gain of selling $100,000 after the tax loss has been exhausted.
Yes, it makes sense to do this, especially if you have a Roth account; see Tax-adjusted asset allocation on the wiki.

There isn't that much difference between taxable and tax-deferred. At your tax rates, you lose 34% of the gains in your traditional IRA/401(k). (You also lose 34% of the present value, but that is independent of your asset allocation; it is a constant dollar amount.) In your taxable account, you would lose 25% of the gains if the stocks paid no dividends, but you lose more than that over time because the tax loss to dividends compounds.
Thanks Grabiner for the pointer on the Tax adjusted asset allocation. I will read this wiki to understand more. You are right that the difference between taxable and tax-deferred is not big for the tax paid to uncle sam.
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Re: international stock in taxable brokerage or ROTH IRA?

Post by woodside »

woodside wrote: Sat Dec 10, 2022 1:19 pm
retired@50 wrote: Sat Dec 10, 2022 12:52 pm
woodside wrote: Sat Dec 10, 2022 12:48 pm
tomsense76 wrote: Sat Dec 10, 2022 2:13 am To OP, it would help to know what percentage of the portfolio is in pre-tax (401k), taxable (brokerage), and tax-free (Roth IRA). For example are they all roughly equal? Or is most of it in pre-tax? Or something else? We can recommend an asset go in one account, but if it won't all fit there will need to be some spillover elsewhere.
The percentages for pre-tax (401k), taxable (brokerage), and tax-free (Roth IRA) are 50:25:25, I updated my first post to reflect this.

Right now, the asset allocation is the same 60/20/20 for US stock/ex US stock/bond for all three accounts.

It seems that I can take all ex US stock from ROTH IRA to taxable. After the re-allocation, the asset allocation for ROTH IRA is 80:0:20 and the asset allocation for the taxable is 40:40:20.

I don't need to worry about the capital gain stuff when shuffling the money around. I just lump sum-ed the money in the taxable after I sold my previous apartment early this year, so a lot of tax loss has already been accumulated.
If you're following the tax efficient fund placement guidelines, then all the bonds or bond funds would be in the pre-tax 401k, and the Roth account would be entirely in stock funds, as would the taxable account.

Regards,
The bond in my taxable is NY Muni Bond, so there is not much of the tax drag. The bond allocation in my taxable can be used for the future large expense (college tuition etc) when it is needed.

I didn't follow the wiki exactly on placing bonds. There are two reasons: 1. My 403B doesn't offer short-term TIPS bonds so I will use my ROTH IRA to have a short-term TIPS bond. 2. The exact mirroring of the asset allocation between pre-tax and post-tax accounts can hedge me if somehow one of the accounts is better.

The overall bond components are 25% NY Muni BOND (taxable): 25% Short-term TIPS: 50% TIAA traditional (minimum 3% interest rate).
With Grabiner's swapping strategy to get money, there seems no need to have NY Muni BOND in the taxable account, this can also decrease the risk due to NY Muni BOND being concentrated in New York State.

I am now more comfortable placing most of the bonds in the tax-deferred account. I am also placing all ex-US Stocks in the taxable account.

The new asset allocation will be as below

Code: Select all

	                 US stock/ex-US Stock/Bond
tax deferred 403B (50%):   70/0/30 
tax free  ROTH IRA (25%):  80/0/20
taxable (25%):             20/80/0	
All:		           60/20/20
The bond in the ROTH IRA will be all short term TIPS, while the Bond in the tax deferred account will be 2/3 TIAA traditional and 1/3 half Total Bond, so the overall bond components are actually are:
total BOND/Short-term TIPS/TIAA traditionl=25/25/50.
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Re: international stock in taxable brokerage or ROTH IRA?

Post by enad »

In his book The Successful Investor Today (14 Simple Truths You Must Know When You Invest) by Larry E Swedroe, Truth 14: There is No One Right Portfolio, but there is One That Is Right for You.

The Location Decision
, Larry writes:

"Let’s now turn to the final asset allocation issue, the location of the asset class in either the taxable or tax‐deferred/nontaxable account. The issue is relatively straightforward. The easiest account to deal with is a Roth account. Withdrawals from such an account are tax exempt. Therefore, we should generally place within that account the asset class with the highest expected return – small value. If no small value is being held, then, in order, the choices should be: large value, emerging markets, real estate, small cap, and finally large cap. Reverse the order for Traditional/Rollover IRA’s.

In taxable accounts we want to place the most tax‐efficient equity asset classes. This is basically a large‐cap fund (like an S&P 500 Index fund), a total stock market fund, or any tax managed fund. The least tax‐efficient asset classes (value, real estate, small cap and taxable fixed income) should be placed in tax-deferred accounts. If there is not any room inside of a tax‐deferred account, and there is no tax‐managed alternative available, then an exchange‐traded fund can be used to gain exposure to the desired asset class (due to their operating structure, exchange‐traded funds are highly like to prove more tax efficient than their non tax‐managed mutual fund counterparts).

One other point on asset location; foreign stock holdings often entail taxes being withheld at the source. Investors can then claim a foreign tax credit that can be used as a credit against U.S. taxes due on a distribution. However, this credit
does no good if the asset is not in a taxable account. Thus if there is a choice between holding similar U.S. and international asset classes in a taxable or tax-deferred account, the international asset should be held in the taxable account. While not a major issue (the impact is likely to be less than fifty basis points per annum), every penny saved is a penny earned."
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Re: international stock in taxable brokerage or ROTH IRA?

Post by unclescrooge »

grabiner wrote: Fri Dec 09, 2022 10:59 pm In a high-tax state, it is better to hold US stocks in taxable and international stocks in tax-advantaged accounts. The reason is that international stocks have higher dividends; the US tax cost is offset by the foreign tax credit, but you also pay the high state tax on the dividend. (There are a few states which allow a foreign tax credit on state tax, but NY is not one of them.)
Would California happen to be one that does?
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Re: international stock in taxable brokerage or ROTH IRA?

Post by mrbojanglezs »

International funds pay too high dividends and not enough are qualified (especially emerging markets) lots of tax drag in taxable. Even with taking into account the Foreign Tax Credit you rarely make it out ahead unless low tax bracket.

US only stocks in taxable for me. Maybe if international fund was developed only.
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Re: international stock in taxable brokerage or ROTH IRA?

Post by woodside »

mrbojanglezs wrote: Sun Dec 11, 2022 9:46 am International funds pay too high dividends and not enough are qualified (especially emerging markets) lots of tax drag in taxable. Even with taking into account the Foreign Tax Credit you rarely make it out ahead unless low tax bracket.

US only stocks in taxable for me. Maybe if international fund was developed only.
Different people have different strategies for international funds.

I am not doing factor tilting. I only use the total stock index or total international stock index (or S&P 500 stock index and developed markets index as a
proxy in 403B where the total stock index or total international stock index are not available). For me, the dividends for international funds are about 2-3%, according to the number provided by livesoft.
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Re: international stock in taxable brokerage or ROTH IRA?

Post by sharukh »

One can use European and Japanese futures in IRA at interactive brokers to save on foreign tax withholding.

Did anyone explored this route?
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Re: international stock in taxable brokerage or ROTH IRA?

Post by grabiner »

unclescrooge wrote: Sun Dec 11, 2022 7:29 am
grabiner wrote: Fri Dec 09, 2022 10:59 pm In a high-tax state, it is better to hold US stocks in taxable and international stocks in tax-advantaged accounts. The reason is that international stocks have higher dividends; the US tax cost is offset by the foreign tax credit, but you also pay the high state tax on the dividend. (There are a few states which allow a foreign tax credit on state tax, but NY is not one of them.)
Would California happen to be one that does?
No, CA doesn't either; I don't have a list handy.
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Re: international stock in taxable brokerage or ROTH IRA?

Post by grabiner »

enad wrote: Sun Dec 11, 2022 6:55 am In his book The Successful Investor Today (14 Simple Truths You Must Know When You Invest) by Larry E Swedroe, Truth 14: There is No One Right Portfolio, but there is One That Is Right for You.

The Location Decision
, Larry writes:

"Let’s now turn to the final asset allocation issue, the location of the asset class in either the taxable or tax‐deferred/nontaxable account. The issue is relatively straightforward. The easiest account to deal with is a Roth account. Withdrawals from such an account are tax exempt. Therefore, we should generally place within that account the asset class with the highest expected return – small value. If no small value is being held, then, in order, the choices should be: large value, emerging markets, real estate, small cap, and finally large cap. Reverse the order for Traditional/Rollover IRA’s.
This should not actually be the top issue. Once you make the proper tax adjustment, there is little difference between traditional and Roth; this has been discussed above.

If you know that your withdrawals will be taxed at 22%, then $7800 in Fund A in a Roth and $10,000 in Fund B in a traditional account will have the same after-tax value as $7800 in Fund B in a Roth and $10,000 in Fund A in a traditional account, regardless of the performance of Fund A and Fund B. (The reason to prefer the higher-returning fund in the Roth is that extra growth in the traditional account may cause some of the withdrawals to be taken at a higher tax rate, or taken prematurely as RMDs you don't need.)

Thus, while I do prefer the highest-returning asset class in Roth if all else is equal, all else is often not equal. If your 401(k) has better stock than bond options, then you should hold stock in the 401(k), which will save you more in expenses than any tax difference. If your tax situation makes bonds in taxable less tax-efficient, then you should hold a stock fund in your taxable account and a bond fund in a tax-advantaged account, even if that has to be in a Roth account.
In taxable accounts we want to place the most tax‐efficient equity asset classes. This is basically a large‐cap fund (like an S&P 500 Index fund), a total stock market fund, or any tax managed fund. The least tax‐efficient asset classes (value, real estate, small cap and taxable fixed income) should be placed in tax-deferred accounts. If there is not any room inside of a tax‐deferred account, and there is no tax‐managed alternative available, then an exchange‐traded fund can be used to gain exposure to the desired asset class (due to their operating structure, exchange‐traded funds are highly like to prove more tax efficient than their non tax‐managed mutual fund counterparts).
Agreed here. However, I believe this was written before ETFs became common. Small-cap ETFs are now just as tax-efficient and inexpensive as large-cap ETFs. Factor ETFs can also avoid capital gains, although some factor ETFs have high dividends which makes them less tax-efficient.

Likewise, whether bonds or stocks are better in a taxable account depends on your tax situation, and on the yield of the bonds. At current yields, stocks in taxable are better for most investors, although I still recommend in-state munis for investors in high tax brackets if Vanguard has a fund for their state.
One other point on asset location; foreign stock holdings often entail taxes being withheld at the source. Investors can then claim a foreign tax credit that can be used as a credit against U.S. taxes due on a distribution. However, this credit
does no good if the asset is not in a taxable account. Thus if there is a choice between holding similar U.S. and international asset classes in a taxable or tax-deferred account, the international asset should be held in the taxable account. While not a major issue (the impact is likely to be less than fifty basis points per annum), every penny saved is a penny earned."
Again, this was probably good advice at the time that it was written. The problem is that US and international funds are no longer "similar", because foreign dividend yields have been higher since 2008, and foreign stocks tend to have more non-qualified dividends. If you hold the foreign stock fund in a taxable account, you get the foreign tax credit, but you also pay more tax on the dividends than you would with a US stock fund. Which one is better depends on your tax situation, and on the specific funds at issue.
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Re: international stock in taxable brokerage or ROTH IRA?

Post by woodside »

After reading grabiner's reply to Larry E Swedroe's suggestion on how to place the different assets into different locations (tax-free, taxable and tax-deferred).

It seems that calculus is constantly changing. The bogleheads wiki page on this topic also at one time suggested placing bonds into the tax-deferred due to its tax inefficiency, at another time it also suggested placing bonds in the taxable account due to the low-interest rate as there is not much tax to pay to begin with.

I guess the key to optimizing the placement of different assets in different locations is depending on two factors
1. The performance of different assets
2. The tax efficiency of different assets at different locations

The performance of the asset is probably going to primarily determine the after-tax portfolio value.

I have a better understanding of the tax efficiency of different assets in different locations. However, the performance of US stock, ex-US stock, and Bonds are not never certain, though long-term performance indicates that US stock, ex-US stock have better performance than Bonds, however, for the last 10 years, ex-US stock's performance is lacking. Not sure for the next 10 years, is the ex-US stock going to beat US stock?

To hedge the different scenarios of the performance of the different assets for many years to come, I probably will go back to the original asset allocation mirroring strategy. This will not give me the best result, but it won't give me the worst result either.

I definitely need to read more on this topic to decide what to do.
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Re: international stock in taxable brokerage or ROTH IRA?

Post by grabiner »

woodside wrote: Mon Dec 12, 2022 9:05 am I guess the key to optimizing the placement of different assets in different locations is depending on two factors
1. The performance of different assets
2. The tax efficiency of different assets at different locations

The performance of the asset is probably going to primarily determine the after-tax portfolio value.

I have a better understanding of the tax efficiency of different assets in different locations. However, the performance of US stock, ex-US stock, and Bonds are not never certain, though long-term performance indicates that US stock, ex-US stock have better performance than Bonds, however, for the last 10 years, ex-US stock's performance is lacking. Not sure for the next 10 years, is the ex-US stock going to beat US stock?
It makes sense to assume about the same total return for US and non-US stock; this is why you hold both of them. If you expected US stock to outperform non-US stock by 2% for your investment lifetime, you wouldn't own any non-US stock because the diversification wouldn't help you.

However, the tax-inefficiency of non-US stock is not based on the total return, but the composition of the return. When advisors first started working out asset location, around 2000, US and foreign stocks had similar dividend yields, which made foreign stocks more tax-efficient. Since 2008, foreign dividends have been higher. In the last few years, foreign dividends have been twice US dividends; Vanguard reports a 3.29% distribution yield on VEA (developed), 3.86% on VWO (emerging) and 1.61% on VTI (total US).

This is also an issue with bonds, which causes the preference for bonds or stocks in a taxable account to depend on the yield. In a 22% tax bracket, the tax cost of a bond fund with a 2% yield is 0.44%, less than for most stock funds (including the tax on the capital gain when you sell), while the tax cost of a bond fund with a 4% yield is 0.88%, more than for most stock funds.
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Re: international stock in taxable brokerage or ROTH IRA?

Post by Northern Flicker »

To evaluate holding an asset in a taxable account, I think the correct comparison is the tax drag on the particular holding in a taxable account vs the tax drag on what would be held instead in the taxable account. The FTC can be accounted for as reducing the tax drag in the taxable account.
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Re: international stock in taxable brokerage or ROTH IRA?

Post by owlgoldfishkangaroo »

livesoft wrote: Sat Dec 10, 2022 7:41 am
4. There is another "cap" when it comes to the foreign tax credit: If one has $20,000 or more of foreign qualified dividend income, then one cannot use the adjustment exception described in the Form 1116 instructions. We keep our Foreign Qualified Dividends below $20,000 by not keeping all our international funds in taxable.
What's the logic here? If you had $20,000 qualified dividends from VXUS in 2021 you had say approximately $20,000 / 3.3% / 90% = $673,400 invested in VXUS in taxable. According to Vanguard's 2021 report (https://personal.vanguard.com/pdf/FASFTCWS_R_012022.pdf) 5.94% taxes of "ordinary dividends" (aka all) were withheld from dividends. So that would be 5.94% * $673,400 * 3.3% = $1,320. By the instructions for Form 1116 (https://www.irs.gov/pub/irs-pdf/i1116.pdf), the FTC would be limited to 0.4054 if you would have paid 15% cap gains or 0.5405 if you would have paid 20%. Those correspond to FTC of $1,320 * (1 - .4054) = $785 or $1,320 * (1 - .5405) = $606, respectively. Taking the larger number, that $785 is only a tax drag of $785 / $673,400 = 0.12% of just your international holdings. Have I calculated this wrong?

I know we are all about reducing costs around here, but this strikes me as the tax tail wagging the dog, or at least unnecessary added complication. I also suspect managing around this, particularly when dealing with other tax matters, will modify your returns more than this achieves. Perhaps if you are right on the edge it would make sense.

Secondly: isn't it true that if held in your tax deferred account, the foreign taxes are still withheld? This would further reduce the advantage of shifting some funds to the tax deferred account. Thank you.
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Re: international stock in taxable brokerage or ROTH IRA?

Post by woodside »

grabiner wrote: Mon Dec 12, 2022 9:27 pm
woodside wrote: Mon Dec 12, 2022 9:05 am I guess the key to optimizing the placement of different assets in different locations is depending on two factors
1. The performance of different assets
2. The tax efficiency of different assets at different locations

The performance of the asset is probably going to primarily determine the after-tax portfolio value.

I have a better understanding of the tax efficiency of different assets in different locations. However, the performance of US stock, ex-US stock, and Bonds are not never certain, though long-term performance indicates that US stock, ex-US stock have better performance than Bonds, however, for the last 10 years, ex-US stock's performance is lacking. Not sure for the next 10 years, is the ex-US stock going to beat US stock?
It makes sense to assume about the same total return for US and non-US stock; this is why you hold both of them. If you expected US stock to outperform non-US stock by 2% for your investment lifetime, you wouldn't own any non-US stock because the diversification wouldn't help you.

However, the tax-inefficiency of non-US stock is not based on the total return, but the composition of the return. When advisors first started working out asset location, around 2000, US and foreign stocks had similar dividend yields, which made foreign stocks more tax-efficient. Since 2008, foreign dividends have been higher. In the last few years, foreign dividends have been twice US dividends; Vanguard reports a 3.29% distribution yield on VEA (developed), 3.86% on VWO (emerging) and 1.61% on VTI (total US).

This is also an issue with bonds, which causes the preference for bonds or stocks in a taxable account to depend on the yield. In a 22% tax bracket, the tax cost of a bond fund with a 2% yield is 0.44%, less than for most stock funds (including the tax on the capital gain when you sell), while the tax cost of a bond fund with a 4% yield is 0.88%, more than for most stock funds.
Thanks grabiner for the detailed calculation. This is very super helpful. Your numbers are focusing on point 2. The tax efficiency of different assets at different locations in different years (added) . The tax efficiency of different assets are changing in different years due to the changes in the dividend rate and interest rate, so one can not set asset allocation in different accounts and forget it. It's easy to change the asset allocation for the tax-free and tax-deferred accounts, but it will become more difficult to change the asset allocation for the taxable account after the accumulated capital gain after many years.

I want to discuss the other point in detail: 1. The performance of different assets.

Let's ignore the tax-deferred to simplify the discussion (the tax-deferred can be treated as tax-free by using the conversion factor as we discussed before. The exceptions are that if tax-deferred becomes too big, the investor may break into the next tax bracket and the tax-deferred may offer some arbitrage opportunities when the investor's tax bracket changes.

I also ignore ex-US stocks for the moment. Let's start with $10K US stocks and $10K US Bonds, there can be two extreme scenarios.
A: The tax-free account has only US stocks, and the taxable account has only US bonds
B: The tax-free account has only US bonds. and the taxable account has only US stocks.
C: The mirror strategy: 50/50 for both tax-free and taxable accounts

Initially, the amount of money is the same for both tax-free accounts and taxable (at $10K). After 10 years, the relative size of the tax-free account to the taxable will change, depending on the performance of different assets.

I: Say we will have bear markets during the next 10 years, the bond performs much better than stocks, then B is better as it has more money than A in the tax-free accounts, so B pulls more money away that is subject to tax.

II: Say we have the usual strong bull markets for the next 10 years, then A is better as it pulls more money away that is subject to tax.

Of course, for both I and II, the amount of post-tax money for C is always between A and B.
As we know, we don't exactly know which of I and II will happen for the next 10 years. If we know, we will just invest in one single asset, why bother investing in the other asset?

Here I ignore the rebalancing for the discussion. A more sophisticated mathematical model (or a software tool) can take the rebalancing into account and also consider the three assets (US stock, ex-US stock, and US bond) and the three locations (tax-free, taxable, and tax-deferred) and also use the historical returns (dividends rate, qualified %, and foreign return credit %), tax brackets, etc to do a thorough analysis.
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Re: international stock in taxable brokerage or ROTH IRA?

Post by livesoft »

owlgoldfishkangaroo wrote: Tue Dec 13, 2022 4:14 am [...]
What's the logic here?
[...]
Secondly: isn't it true that if held in your tax deferred account, the foreign taxes are still withheld? This would further reduce the advantage of shifting some funds to the tax deferred account. Thank you.
What a wonderful analysis! Thanks! I think you should provide a tutorial for filling out a Form 1116 in the situation you described in a separate thread with annotated images of the form. It has also been awhile since anyone (@jcloud last time) posted a link to tax-cost spreadsheet such as this link: viewtopic.php?t=375087

For my tax situation, we are not wealthy enough to have as much as $673K+ invested in an international fund in a taxable account. Also, our qualified dividend tax rate is 0%. But our tax rate wasn't always that low.

Perhaps we all need to remember that an Investment Portfolio rarely goes from $0.00 to $5,000,000 overnight be cause of a windfall. Instead, I think more often that a portfolio is accumulated over years of periodic investing and changes in the tax laws. For us, we started out not even having taxable investments at all. That meant that international funds were held in tax-advantaged accounts anyways where selling international funds when rebalancing had no tax consequences. It also meant that one day one wakes up with a portfolio consisting of international and domestic funds in both taxable and tax-advantaged. And that one is NOT going to realize capital gains in taxable to avoid a mere 0.1% to 0.2% tax-cost. But that's what you were driving at anyways.
David Byrne (sort of) wrote:And you may find yourself with a beautiful portfolio,
with a beautiful VEA
And you may ask yourself
"Well, how did I get here?"
Furthermore, if one is happily filling out tax returns over decades then one doesn't pay attention to esoteric things like missing that $20,000 adjustment exception because it doesn't apply (that is, the exception usually applies). BTW, people who do not pay federal income taxes (apparently more than 40% of US taxpayers) do not need to worry about the foreign tax credit because they will never get it.

It would be interesting to get some testimonials of taxpayers that actually have to worry about the $20,000 foreign qualified dividend thing.
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Re: international stock in taxable brokerage or ROTH IRA?

Post by woodside »

There is another thread on this topic, so the two threads can learn from each other.

viewtopic.php?t=389381
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Re: international stock in taxable brokerage or ROTH IRA?

Post by Cranberry44 »

grabiner wrote: Fri Dec 09, 2022 10:59 pm In a high-tax state, it is better to hold US stocks in taxable and international stocks in tax-advantaged accounts. The reason is that international stocks have higher dividends; the US tax cost is offset by the foreign tax credit, but you also pay the high state tax on the dividend. (There are a few states which allow a foreign tax credit on state tax, but NY is not one of them.)
panhead wrote: Thu Dec 08, 2022 7:08 am The foreign tax credit has a "cap." I forget what this cap is, but I'm sure someone will chime in or you can google it. Once your investment in foreign funds results in hitting this cap on the credit, I think it's better to move subsequent foreign fund investments into tax advantaged accounts. Since my tax deferred is filled with bonds, I increased my foreign fund investments in my Roth IRA.
The cap is not a limit on the credit, but a limit on the ability to take the credit without filing Form 1116. Most investors in foreign stock funds will get the full foreign tax back as a credit after filing Form 1116. (I have been filing the form for years, in my moderate federal and high state tax bracket, and the limit for the credit is usually about twice the foreign tax, so I get the full credit.)
… having trouble finding this with a quick google search. Does this apply to California residents? Does CA allow a foreign tax credit on state tax? Or is it better for californians to hold international in tax advantaged?
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Re: international stock in taxable brokerage or ROTH IRA?

Post by grabiner »

Cranberry44 wrote: Mon Dec 19, 2022 8:39 am
grabiner wrote: Fri Dec 09, 2022 10:59 pm In a high-tax state, it is better to hold US stocks in taxable and international stocks in tax-advantaged accounts. The reason is that international stocks have higher dividends; the US tax cost is offset by the foreign tax credit, but you also pay the high state tax on the dividend. (There are a few states which allow a foreign tax credit on state tax, but NY is not one of them.)
… having trouble finding this with a quick google search. Does this apply to California residents? Does CA allow a foreign tax credit on state tax? Or is it better for californians to hold international in tax advantaged?
CA does not allow a foreign tax credit, and with the high CA taxes, it is better to hold international in tax advantaged.

The best way to check this is to get the state tax form and instructions from the state tax bureau web site. There will be a form for state tax credits, and that form or its instruction should say whether there is a foreign tax credit.

Of the states listed in State income taxes on the wiki, only AZ allows a foreign tax credit. DE allows an itemized deduction even if you took foreign taxes as a credit, but that is worth much less; $1000 of foreign tax reduces your DE tax by $66.
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dan7800
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Re: international stock in taxable brokerage or ROTH IRA?

Post by dan7800 »

Hello, I am a New York State resident, filing jointly in the 24% tax bracket. Would it make more sense for me to keep my ex US (VXUS/IXUS) in my taxable, or tax advantaged account? Ive been adding ex us to my taxable since I assumed that the FTC made this slightly advantageous, but I obviously could be wrong.

Note, I always fill up my ROTH & 401k each year, and I only buy VTI or VXUS/IXUS & total bonds with any new contributions.

Thanks all
-Dan
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Re: international stock in taxable brokerage or ROTH IRA?

Post by Cranberry44 »

grabiner wrote: Mon Dec 19, 2022 10:06 pm
Cranberry44 wrote: Mon Dec 19, 2022 8:39 am
grabiner wrote: Fri Dec 09, 2022 10:59 pm In a high-tax state, it is better to hold US stocks in taxable and international stocks in tax-advantaged accounts. The reason is that international stocks have higher dividends; the US tax cost is offset by the foreign tax credit, but you also pay the high state tax on the dividend. (There are a few states which allow a foreign tax credit on state tax, but NY is not one of them.)
… having trouble finding this with a quick google search. Does this apply to California residents? Does CA allow a foreign tax credit on state tax? Or is it better for californians to hold international in tax advantaged?
CA does not allow a foreign tax credit, and with the high CA taxes, it is better to hold international in tax advantaged.

The best way to check this is to get the state tax form and instructions from the state tax bureau web site. There will be a form for state tax credits, and that form or its instruction should say whether there is a foreign tax credit.

Of the states listed in State income taxes on the wiki, only AZ allows a foreign tax credit. DE allows an itemized deduction even if you took foreign taxes as a credit, but that is worth much less; $1000 of foreign tax reduces your DE tax by $66.

Wow. Thanks so much, grabiner!

Question: it is more advantageous to hold international in Roth IRA or 403b?

I’m bummed though because I decided a couple years ago when I started investing that I’d put international funds in my taxable and place US funds in tax advantaged. Guess I chose wrong.

About 25% of my total asset allocation is international etf (IXUS) (I’m 100% equities) — about 40k. I suppose I’ll now start making my international purchases in tax advantaged.
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Re: international stock in taxable brokerage or ROTH IRA?

Post by grabiner »

Cranberry44 wrote: Tue Dec 20, 2022 9:51 am Question: it is more advantageous to hold international in Roth IRA or 403b?
There is no particular reason to favor US or international in traditional versus Roth retirement accounts. Presumably, you expect similar returns from both, since you wouldn't otherwise hold both. Therefore, the more important criterion should be the options in your employer plan. If you have a better US than international fund in the employer plan (which is common), hold US stock there and international stock in your IRA, whether the plans are traditional or Roth.
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Re: international stock in taxable brokerage or ROTH IRA?

Post by Bklmt2000 »

I hold international in my 401k (Vanguard total intl stock, VTIAX) and will add int'l to my Roth next year, as being an Ohio resident, we don't get any kind of foreign tax credit, according to the state tax department.

So holding international in 401k/Roth makes the most sense for me. Taxable is all US stuff (stock funds + Treas bond fund).
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Re: international stock in taxable brokerage or ROTH IRA?

Post by Artsdoctor »

OK, I'll be the curmudgeon here.

I've had Vanguard's international funds and ETFs in taxable accounts for many years. Last year, I came to the conclusion that they've been a PITA for me and won't be adding more to the mix in a taxable account. The dividends have been higher than domestic funds and the performance of international funds have been relatively poor (I accept that but higher taxes with poor performance is a bitter pill). I'm in a relatively high marginal tax rate, have paid NIIT for years, and I live in California. Form 1116 has never come naturally to me and I struggle with it every year--but ultimately I have an accountant who does the formal return since I also have a business. Nonetheless, there will come a time when Form 1116 will most likely be all my responsibility and after last year's TurboTax debacle with it, I've soured on the steps I have to take to get the FTC. So overall, I'm not a fan of international in taxable. But like everyone has said, it's a personal decision.
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Re: international stock in taxable brokerage or ROTH IRA?

Post by Kookaburra »

Regarding the argument in favor of placing bonds in tax-deferred accounts to limit growth and future RMDs/taxes, couldn’t this be an argument in favor of holding international stocks there too?

Since 2010,

VTIAX has a CAGR of 3.7%.
VBTLX has a CAGR of 1.9%
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Re: international stock in taxable brokerage or ROTH IRA?

Post by Kookaburra »

Artsdoctor wrote: Tue Dec 20, 2022 6:31 pm OK, I'll be the curmudgeon here.

I've had Vanguard's international funds and ETFs in taxable accounts for many years. Last year, I came to the conclusion that they've been a PITA for me and won't be adding more to the mix in a taxable account. The dividends have been higher than domestic funds and the performance of international funds have been relatively poor (I accept that but higher taxes with poor performance is a bitter pill). I'm in a relatively high marginal tax rate, have paid NIIT for years, and I live in California. Form 1116 has never come naturally to me and I struggle with it every year--but ultimately I have an accountant who does the formal return since I also have a business. Nonetheless, there will come a time when Form 1116 will most likely be all my responsibility and after last year's TurboTax debacle with it, I've soured on the steps I have to take to get the FTC. So overall, I'm not a fan of international in taxable. But like everyone has said, it's a personal decision.
I’m in the same boat as you. With my K-1, Form 1116 was a nightmare last year. With the dip in stock this year, I tax-loss harvested out of a lot of international funds in my taxable account and re-purchased in my 401k.
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Re: international stock in taxable brokerage or ROTH IRA?

Post by grabiner »

Kookaburra wrote: Tue Dec 20, 2022 6:46 pm Regarding the argument in favor of placing bonds in tax-deferred accounts to limit growth and future RMDs/taxes, couldn’t this be an argument in favor of holding international stocks there too?

Since 2010,

VTIAX has a CAGR of 3.7%.
VBTLX has a CAGR of 1.9%
If you expect international stocks to barely return more than bonds, you shouldn't hold them at all; the diversification benefit for holding international stocks is much less than for holding bonds.

But if you expect US and international stocks to have similar returns, then you should hold both, and then the traditional versus Roth decision becomes essentially neutral. International stocks have slightly lower expected returns because of the lost foreign tax credit, which is a minor preference for holding them in traditional accounts. But working the other way is that international stocks are significantly more volatile, and thus holding them in traditional accounts increases the risk that the traditional account will become so large that some of the withdrawals will be made in a higher tax bracket than you expected, or as RMDs before you need to spend the money.
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Re: international stock in taxable brokerage or ROTH IRA?

Post by Makefile »

livesoft wrote: Tue Dec 13, 2022 6:17 am It would be interesting to get some testimonials of taxpayers that actually have to worry about the $20,000 foreign qualified dividend thing.
It isn't just $20,000 in foreign qualified dividends. Anyone in a 32% or higher tax bracket, who holds international stocks in taxable, and has to file Form 1116 has to adjust qualified dividends.

I suspect the $20,000 is only relevant if a high-income investor accumulates enough international stock in taxable to hit the $20,000 threshold (during which time, they are likely at 32% or higher and have been adjusting qualified dividends anyway) after which they retire, drop into the 24% or lower tax bracket, but then keep adjusting due to the $20,000.

The worst case would be dropping all the way down such that qualified dividends are taxed at 0%, because you "adjust" those by not including them at all on Form 1116.
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Re: international stock in taxable brokerage or ROTH IRA?

Post by Artsdoctor »

Kookaburra wrote: Tue Dec 20, 2022 6:46 pm Regarding the argument in favor of placing bonds in tax-deferred accounts to limit growth and future RMDs/taxes, couldn’t this be an argument in favor of holding international stocks there too?

Since 2010,

VTIAX has a CAGR of 3.7%.
VBTLX has a CAGR of 1.9%
Now THIS certainly made me chuckle. You're right: many years ago, I really limited my tax-deferred accounts to mostly fixed income not only because of tax efficiency issues but because I wanted the more significant growth in my taxable and Roth accounts, not my tax-deferred accounts. However, in my heart of hearts, I believed that international equities would return more than bonds--and I still believe that. One could argue that international should out-perform domestic equities going forward because of valuations but I'm not going quite that far.
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Re: international stock in taxable brokerage or ROTH IRA?

Post by dan7800 »

dan7800 wrote: Tue Dec 20, 2022 7:03 am Hello, I am a New York State resident, filing jointly in the 24% tax bracket. Would it make more sense for me to keep my ex US (VXUS/IXUS) in my taxable, or tax advantaged account? Ive been adding ex us to my taxable since I assumed that the FTC made this slightly advantageous, but I obviously could be wrong.

Note, I always fill up my ROTH & 401k each year, and I only buy VTI or VXUS/IXUS & total bonds with any new contributions.

Thanks all
-Dan
Just checking on this. Based upon previous threads, it SEEMS Like it is likely not much difference if international is held in taxable vs tax friendly? I am just wondering if any NYS or CAL (high tax st) residents ever did the math to determine if international should be held in taxable or not?

Thanks all
-Dan
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Re: international stock in taxable brokerage or ROTH IRA?

Post by grabiner »

dan7800 wrote: Fri Dec 30, 2022 12:17 pm
dan7800 wrote: Tue Dec 20, 2022 7:03 am Hello, I am a New York State resident, filing jointly in the 24% tax bracket. Would it make more sense for me to keep my ex US (VXUS/IXUS) in my taxable, or tax advantaged account? Ive been adding ex us to my taxable since I assumed that the FTC made this slightly advantageous, but I obviously could be wrong.

Note, I always fill up my ROTH & 401k each year, and I only buy VTI or VXUS/IXUS & total bonds with any new contributions.

Thanks all
-Dan
Just checking on this. Based upon previous threads, it SEEMS Like it is likely not much difference if international is held in taxable vs tax friendly? I am just wondering if any NYS or CAL (high tax st) residents ever did the math to determine if international should be held in taxable or not?
In high-tax states with no state foreign tax credit, and also in high tax brackets, it is better to hold foreign stock in tax-advantaged and US stock in taxable.

Here is my standard example, which uses numbers that are close to recent averages.

A US stock fund has a dividend yield of 2%, all qualified.
A foreign stock fund has a dividend yield of 3%, 2/3 qualified, and 8% of the dividend is withheld as foreign tax (so that you would receive only 2.76% dividend in your account.)

For both funds, you pay the same tax on the 2% qualified dividend.
The foreign fund also has tax due on the 1% non-qualified dividend, and 0.24% you get back as a foreign tax credit.

Therefore, if your marginal tax rate on non-qualified dividends is more than 24%, you should prefer the foreign stock in a tax-advantaged account. This may be because you are in the 22% or 24% bracket and also pay state tax, or because you are in the 24% bracket and also pay 3.8% Net Investment Income Tax or are in the phase-out of some tax benefit, or because you are in the 32% bracket.

I am in the 24% bracket and pay 8.2% state tax, so I would prefer US stock in taxable if all else is equal. However, all else is not always equal. I have long held VSS (Vanguard FTSE All-World Ex-US Small-Cap ETF) in my taxable account because there is no comparable option in my employer plan and I have a Roth IRA full of less tax-efficient funds.
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Re: international stock in taxable brokerage or ROTH IRA?

Post by dan7800 »

grabiner wrote: Fri Dec 30, 2022 2:15 pm
dan7800 wrote: Fri Dec 30, 2022 12:17 pm
dan7800 wrote: Tue Dec 20, 2022 7:03 am Hello, I am a New York State resident, filing jointly in the 24% tax bracket. Would it make more sense for me to keep my ex US (VXUS/IXUS) in my taxable, or tax advantaged account? Ive been adding ex us to my taxable since I assumed that the FTC made this slightly advantageous, but I obviously could be wrong.

Note, I always fill up my ROTH & 401k each year, and I only buy VTI or VXUS/IXUS & total bonds with any new contributions.

Thanks all
-Dan
Just checking on this. Based upon previous threads, it SEEMS Like it is likely not much difference if international is held in taxable vs tax friendly? I am just wondering if any NYS or CAL (high tax st) residents ever did the math to determine if international should be held in taxable or not?
In high-tax states with no state foreign tax credit, and also in high tax brackets, it is better to hold foreign stock in tax-advantaged and US stock in taxable.

Here is my standard example, which uses numbers that are close to recent averages.

A US stock fund has a dividend yield of 2%, all qualified.
A foreign stock fund has a dividend yield of 3%, 2/3 qualified, and 8% of the dividend is withheld as foreign tax (so that you would receive only 2.76% dividend in your account.)

For both funds, you pay the same tax on the 2% qualified dividend.
The foreign fund also has tax due on the 1% non-qualified dividend, and 0.24% you get back as a foreign tax credit.

Therefore, if your marginal tax rate on non-qualified dividends is more than 24%, you should prefer the foreign stock in a tax-advantaged account. This may be because you are in the 22% or 24% bracket and also pay state tax, or because you are in the 24% bracket and also pay 3.8% Net Investment Income Tax or are in the phase-out of some tax benefit, or because you are in the 32% bracket.

I am in the 24% bracket and pay 8.2% state tax, so I would prefer US stock in taxable if all else is equal. However, all else is not always equal. I have long held VSS (Vanguard FTSE All-World Ex-US Small-Cap ETF) in my taxable account because there is no comparable option in my employer plan and I have a Roth IRA full of less tax-efficient funds.
A wealth of knowledge and a great answer as always. Thank you so much. It looks like I will be shifting my ex US holdings to my TA account.

For future reference for NYS residents, "New York State does not offer a foreign tax credit or a foreign income tax itemized deduction for any other countries"
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Re: international stock in taxable brokerage or ROTH IRA?

Post by dan7800 »

grabiner wrote: Fri Dec 30, 2022 2:15 pm
dan7800 wrote: Fri Dec 30, 2022 12:17 pm
dan7800 wrote: Tue Dec 20, 2022 7:03 am Hello, I am a New York State resident, filing jointly in the 24% tax bracket. Would it make more sense for me to keep my ex US (VXUS/IXUS) in my taxable, or tax advantaged account? Ive been adding ex us to my taxable since I assumed that the FTC made this slightly advantageous, but I obviously could be wrong.

Note, I always fill up my ROTH & 401k each year, and I only buy VTI or VXUS/IXUS & total bonds with any new contributions.

Thanks all
-Dan
Just checking on this. Based upon previous threads, it SEEMS Like it is likely not much difference if international is held in taxable vs tax friendly? I am just wondering if any NYS or CAL (high tax st) residents ever did the math to determine if international should be held in taxable or not?
In high-tax states with no state foreign tax credit, and also in high tax brackets, it is better to hold foreign stock in tax-advantaged and US stock in taxable.

Here is my standard example, which uses numbers that are close to recent averages.

A US stock fund has a dividend yield of 2%, all qualified.
A foreign stock fund has a dividend yield of 3%, 2/3 qualified, and 8% of the dividend is withheld as foreign tax (so that you would receive only 2.76% dividend in your account.)

For both funds, you pay the same tax on the 2% qualified dividend.
The foreign fund also has tax due on the 1% non-qualified dividend, and 0.24% you get back as a foreign tax credit.

Therefore, if your marginal tax rate on non-qualified dividends is more than 24%, you should prefer the foreign stock in a tax-advantaged account. This may be because you are in the 22% or 24% bracket and also pay state tax, or because you are in the 24% bracket and also pay 3.8% Net Investment Income Tax or are in the phase-out of some tax benefit, or because you are in the 32% bracket.

I am in the 24% bracket and pay 8.2% state tax, so I would prefer US stock in taxable if all else is equal. However, all else is not always equal. I have long held VSS (Vanguard FTSE All-World Ex-US Small-Cap ETF) in my taxable account because there is no comparable option in my employer plan and I have a Roth IRA full of less tax-efficient funds.

Just testing out my understand of things:

Here are the rates for ordinary or nonqualified dividends in 2023,
Ordinary Rate. Single Joint
22% $44,725 to $95,375 $89,450 to $190,750
24% $95,375 to $182,100 $190,750 to $364,200

Assuming a no state foreign tax credit:
- So if a couple jointly made 89-190 then they'd be taxed at the 22% rate, and since they'd get .24 back, then shouldn't they hold ex us in taxable ?
- If a couple jointly made 190-364 then they'd be taxed at the 24% rate, so it would be a wash?

I am just wondering if/why a married couple in the 22% in a state that didn't offer FTC should hold ex us in taxable.

Your explanation was very good, my pea sized brain is just having trouble wrapping my head around things.
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