Do you owe tax on the whole foreign dividend even if the fund (like VT) does not get the tax credit?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
User avatar
Topic Author
grabiner
Advisory Board
Posts: 35307
Joined: Tue Feb 20, 2007 10:58 pm
Location: Columbia, MD

Do you owe tax on the whole foreign dividend even if the fund (like VT) does not get the tax credit?

Post by grabiner »

This question came up in the Baltimore Bogleheads.

If a fund such as Vanguard Total World Stock Index (VT/VTWAX) is less than 50% invested in foreign stock, shareholders are not eligible for the foreign tax credit. Is the taxable dividend equal to the distributed dividend, or is it increased by the unclaimed credit?

In a fund eligible for the foreign tax credit, if the fund receives $1000 in dividends and $80 is withheld for foreign tax, you receive $920 in your brokerage account, but the 1099-DIV reports the full $1000. You pay tax on the $1000, and get an $80 credit back, so you pay the same tax as if you had received the $1000.

In a fund not eligible for the credit, if the fund receives $1000 in dividends and $40 is withheld for foreign tax, you receive $960. Is the dividend reported on the 1099-DIV $960 or $1000? I expect $1000, based on my understanding of taxes, but would like a confirmation.

If you hold such a fund in your brokerage account, you can check this by comparing your 1099-DIV and brokerage statement; does the 1099-DIV equal the deposit?

(Edited to fix typo)
Last edited by grabiner on Sun Jan 16, 2022 9:03 pm, edited 1 time in total.
Wiki David Grabiner
nalor511
Posts: 5058
Joined: Mon Jul 27, 2015 1:00 am

Re: Do you owe tax on the whole foreign dividend even if the fund (like VT) does not get the tax credit?

Post by nalor511 »

You owe taxes on the whole thing, even the part going to foreign taxes, which makes VT so frustrating. I hold vti+vxus(or vea/vwo), instead.
User avatar
JoMoney
Posts: 16260
Joined: Tue Jul 23, 2013 5:31 am

Re: Do you owe tax on the whole foreign dividend even if the fund (like VT) does not get the tax credit?

Post by JoMoney »

:shock:
That's surprising.
[deleted ... possibly wrong info]
Last edited by JoMoney on Sun Jan 16, 2022 6:50 pm, edited 2 times in total.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
Makefile
Posts: 2657
Joined: Fri Apr 22, 2016 11:03 pm

Re: Do you owe tax on the whole foreign dividend even if the fund (like VT) does not get the tax credit?

Post by Makefile »

The VTWAX annual report suggests there is a foreign tax credit coming this year:
Special 2021 tax information (unaudited) for Vanguard Total World Stock Index Fund

This information for the fiscal year ended October 31, 2021, is included pursuant to provisions of the Internal Revenue Code.

The fund distributed $441,312,000 of qualified dividend income to shareholders during the fiscal year.

The fund distributed $11,391,000 of qualified business income to shareholders during the fiscal year.

For corporate shareholders, 32.7% of investment income (dividend income plus short-term gains, if any) qualifies for the dividends-received deduction.

The fund designates to shareholders foreign source income of $367,125,000 and foreign taxes paid of $32,300,000. Shareholders will receive more detailed information with their Form 1099-DIV in January 2022 to determine the calendar-year amounts to be included on their 2021 tax returns.
Last year, that section said:
Special 2020 tax information (unaudited) for Vanguard Total World Stock Index Fund

This information for the fiscal year ended October 31, 2020, is included pursuant to provisions of the Internal Revenue Code.

The fund distributed $341,286,000 of qualified dividend income to shareholders during the fiscal year.

For corporate shareholders, 44.1% of investment income (dividend income plus short-term gains, if any) qualifies for the dividends-received deduction.

The fund distributed 10,339,000 of qualified business income to shareholders during the fiscal year.
Not sure how the 50% rule is/was supposed to work...
User avatar
House Blend
Posts: 4878
Joined: Fri May 04, 2007 1:02 pm

Re: Do you owe tax on the whole foreign dividend even if the fund (like VT) does not get the tax credit?

Post by House Blend »

grabiner wrote: Sun Jan 16, 2022 6:01 pm In a fund not eligible for the credit, if the fund receives $1000 in dividends and $40 is withheld for foreign tax, you receive $960. Is the dividend reported on the 1099-DIV $960 or $1000? I expect $1000, based on my understanding of taxes, but would like a confirmation.
I was a shareholder of VG Total International back in the days when it was a fund-of-funds, and tax law at the time did not allow a fund of funds to pass the foreign tax credit through to shareholders.

I checked my 1099-DIV and annual statement for 2007. The numbers match.

So if your ability to claim the Foreign Tax Credit is limited, you may be better off with a fund that is not FTC-eligible.
passive101
Posts: 630
Joined: Tue May 05, 2020 2:47 pm

Re: Do you owe tax on the whole foreign dividend even if the fund (like VT) does not get the tax credit?

Post by passive101 »

I still don't understand this foreign tax credit thing, but does any of this matter if you hold VT in tax sheltered accounts such as an IRA or HSA?
nalor511
Posts: 5058
Joined: Mon Jul 27, 2015 1:00 am

Re: Do you owe tax on the whole foreign dividend even if the fund (like VT) does not get the tax credit?

Post by nalor511 »

passive101 wrote: Sun Jan 16, 2022 10:53 pm I still don't understand this foreign tax credit thing, but does any of this matter if you hold VT in tax sheltered accounts such as an IRA or HSA?
No
passive101
Posts: 630
Joined: Tue May 05, 2020 2:47 pm

Re: Do you owe tax on the whole foreign dividend even if the fund (like VT) does not get the tax credit?

Post by passive101 »

I'm glad to hear that. I have my Roth IRA in VTWAX and HSA is VT.
User avatar
JoMoney
Posts: 16260
Joined: Tue Jul 23, 2013 5:31 am

Re: Do you owe tax on the whole foreign dividend even if the fund (like VT) does not get the tax credit?

Post by JoMoney »

passive101 wrote: Sun Jan 16, 2022 10:53 pm I still don't understand this foreign tax credit thing, but does any of this matter if you hold VT in tax sheltered accounts such as an IRA or HSA?
There is foreign tax withholding intrinsic to the fund on the dividend distributions from most foreign stocks, this happens regardless of what type of account you hold it in.
Despite paying the foreign taxes (reducing the total return of what the fund would have been without having payed them), you can't claim the foreign tax credit on your U.S. taxes if you hold international funds in a tax sheltered account like IRA or HSA.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
passive101
Posts: 630
Joined: Tue May 05, 2020 2:47 pm

Re: Do you owe tax on the whole foreign dividend even if the fund (like VT) does not get the tax credit?

Post by passive101 »

What a strange rule. So technically VT is not as user friendly as VTI + another international fund.

How much is the max credit that I might be missing out on in a year with VT? Is it enough that I should really care? VT is really popular so I'm guessing maybe it's not much?
nolesrule
Posts: 2631
Joined: Thu Feb 26, 2015 9:59 am

Re: Do you owe tax on the whole foreign dividend even if the fund (like VT) does not get the tax credit?

Post by nolesrule »

In 2020, the total of all dividend distributions on my children's brokerage accounts reported in the transaction history were equal to the Ordinary Dividends reported by Vanguard on the 1099s. The only holding they had was VT.
User avatar
steve r
Posts: 1300
Joined: Mon Feb 13, 2012 7:34 pm
Location: Connecticut

Re: Do you owe tax on the whole foreign dividend even if the fund (like VT) does not get the tax credit?

Post by steve r »

passive101 wrote: Mon Jan 17, 2022 7:34 am What a strange rule. So technically VT is not as user friendly as VTI + another international fund.

How much is the max credit that I might be missing out on in a year with VT? Is it enough that I should really care? VT is really popular so I'm guessing maybe it's not much?
I am interested in this as well.

My understanding is that those with a large taxable account prefer to put VXUS in it (to claim the dividend).

Personally, almost everything invested is tax sheltered. So, VT or VTI and another doesn't matter. I can't claim the credit.

On one of those long "how much international" threads I saw a poster claim that this is a drag of maybe 10 basis +/- points. But, I have no idea if this is accurate or just ball parked or where I saw it. (Heck, what I recall could have been on an international bond thread). I guess I would like to know how much as a basis point / expense ratio equivalent.
"Owning the stock market over the long term is a winner's game. Attempting to beat the market is a loser's game. ..Don't look for the needle in the haystack. Just buy the haystack." Jack Bogle
User avatar
JoMoney
Posts: 16260
Joined: Tue Jul 23, 2013 5:31 am

Re: Do you owe tax on the whole foreign dividend even if the fund (like VT) does not get the tax credit?

Post by JoMoney »

passive101 wrote: Mon Jan 17, 2022 7:34 am What a strange rule. So technically VT is not as user friendly as VTI + another international fund.

How much is the max credit that I might be missing out on in a year with VT? Is it enough that I should really care? VT is really popular so I'm guessing maybe it's not much?
If you're holding the funds inside an IRA/HSA as you indicated, you would not be able to claim the foreign tax credit regardless of whether or not you held separate funds. You would need to hold the international in a taxable account in order to be able to claim the credit.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
User avatar
JoMoney
Posts: 16260
Joined: Tue Jul 23, 2013 5:31 am

Re: Do you owe tax on the whole foreign dividend even if the fund (like VT) does not get the tax credit?

Post by JoMoney »

Over in this thread, viewtopic.php?p=6453467#p6453467
I recently attempted to estimate how much foreign tax withholding there was in VT. For 2021 it looked like 6.6% of the gross dividend amounts was withheld.

Here's a Morningstar Growth Chart representing $10,000 growth in the MSCI All Country World Index (ex.USA) with both the "Net Return" (index after foreign withholding) and the "Gross Return" (index without foreign withholding)
LINK
Over the past 10 years the amount equated to about -0.46% annualized difference from the foreign tax withholding.

FWIW, a fund that actually tracks the ACWI ex US (iShares ETF: ACWX ) was only -0.10% off from the MSCI ACWI exUS NR index, yet has an expense ratio of .31% , so the amount for foreign tax withholding realized by an actual mutual fund might be slightly better than the index implies.
ACWX ETF Chart
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
User avatar
JoMoney
Posts: 16260
Joined: Tue Jul 23, 2013 5:31 am

Re: Do you owe tax on the whole foreign dividend even if the fund (like VT) does not get the tax credit?

Post by JoMoney »

^--None of which answers the pertinent and very interesting question posed by OP:

Does the 1099-DIV amount for your international stock fund match the dividend amount you received, or the gross amount (pre-withholding) of the fund?

FWIW, I've found notes on other tax forums discussing the fact that for those holding individual ADR stocks, they are taxed for the full dividend amount gross of the fees charged by the foreign bank custodian acting as the intermediary of the ADR, but those posts were mostly about the bank fees that get built into these 'international stocks' (and lamenting their inability to deduct those costs) and not necessarily specific to the foreign tax withholding amounts (that can be deducted if held in taxable account.)
e.g.
https://ttlc.intuit.com/community/inves ... /00/372636

iamquizzical
Level 1
‎March 22, 2021 1:10 PM
Spino,

You appear very knowledgeable about ADRs. I have a question that is related to what you have written. I own ADRs in my UK-based company. When dividends are reported, I receive a statement indicating that, for example, the total "gross" dividend is worth $1,000 and that the processor's fee is $15, making my "net" dividend $985. When the processor reports the dividend income on which I should pay US income taxes, they report at the "gross" dividend level of $1,000. This seems wrong to me since I never received $1,000, but instead only the "net dividend" of $985. I'm not sure why I should pay taxes on the processor's fees. In your experience, what is the proper dividend income on which I should be paying taxes? Thank you for your perspective!

Paul
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
User avatar
steve r
Posts: 1300
Joined: Mon Feb 13, 2012 7:34 pm
Location: Connecticut

Re: Do you owe tax on the whole foreign dividend even if the fund (like VT) does not get the tax credit?

Post by steve r »

Thanks.

In taxable you pay taxes on dividends. You receive dividends. You already paid taxes though the fund on the dividend. The FTC lets you reduce your tax bill by the amount of the foreign taxes paid by the fund.

So my question: do you still pay taxes on the dividend and are simply not double taxed?

Note the credit is limited to the amount of taxes you pay on dividends.

---
https://www.vanguard.com/pdf/RTFTCWS_022021.pdf

Double check of above:

VEU (ex U.S.) paid total tax of 0.09213 times dividend per share in taxes -- this means the fund already paid roughly a 9 percent tax rate on dividends paid to foreign governments.

Dividends last year were $1.89 for year. So, the fund paid about $0.174 per share. It traded / trades around $62 per share.

This is 0.27 basis points for a fund that is 100 percent ex U.S. Forty percent of that is ... 0.11 (as approximated in the link provided by JoMoney).

---

Takeaway.

In the "How Much International" discussion threads -- with regards to IRAs and the like, you are paying 25 to 30 basis points in taxes for your international holdings that you would not have to pay if those holdings were in the U.S. This is not enough for me to want to change my allocation, but I can see why it may for others.

For others (not a concern of mine) In taxable accounts. You do miss out on a small tax credit with VT (as opposed to a split). In addition, you have higher expense ratios with VT. Behavioral issues may come into play. For tax management to the max folks, there is a very small benefit by being heavy U.S. in tax deferred accounts with more international in taxable.

I am not an accountant.
"Owning the stock market over the long term is a winner's game. Attempting to beat the market is a loser's game. ..Don't look for the needle in the haystack. Just buy the haystack." Jack Bogle
rkhusky
Posts: 17763
Joined: Thu Aug 18, 2011 8:09 pm

Re: Do you owe tax on the whole foreign dividend even if the fund (like VT) does not get the tax credit?

Post by rkhusky »

steve r wrote: Mon Jan 17, 2022 8:45 am For others (not a concern of mine) In taxable accounts. You do miss out on a small tax credit with VT (as opposed to a split). In addition, you have higher expense ratios with VT. Behavioral issues may come into play. For tax management to the max folks, there is a very small benefit by being heavy U.S. in tax deferred accounts with more international in taxable.
Does that also take into account that in recent years international has paid out a higher rate of dividends and that fewer of the dividends are qualified?
User avatar
steve r
Posts: 1300
Joined: Mon Feb 13, 2012 7:34 pm
Location: Connecticut

Re: Do you owe tax on the whole foreign dividend even if the fund (like VT) does not get the tax credit?

Post by steve r »

On more observation (perhaps the wrong thread)

https://www.vanguard.com/pdf/RTFTCWS_022021.pdf lists target date funds. I thought I read target date funds cannot get FTC. :?: Any thoughts?

None the less, I did a similar analysis of the FTC equivalent for 2065 fund and it came up with .08 (note it is roughly 36 percent international equities).
"Owning the stock market over the long term is a winner's game. Attempting to beat the market is a loser's game. ..Don't look for the needle in the haystack. Just buy the haystack." Jack Bogle
retiringwhen
Posts: 4743
Joined: Sat Jul 08, 2017 10:09 am
Location: New Jersey, USA

Re: Do you owe tax on the whole foreign dividend even if the fund (like VT) does not get the tax credit?

Post by retiringwhen »

steve r wrote: Mon Jan 17, 2022 9:33 am On more observation (perhaps the wrong thread)

https://www.vanguard.com/pdf/RTFTCWS_022021.pdf lists target date funds. I thought I read target date funds cannot get FTC. :?: Any thoughts?

None the less, I did a similar analysis of the FTC equivalent for 2065 fund and it came up with .08 (note it is roughly 36 percent international equities).
Generally, FTC is the least of the problem with TDF in taxable accounts. Just look at realized LTCG and STCG on those funds last year!

TDF are great for retirement accounts where you'd never get the FTC anyway, and one should never let something as small as the FTC impact your decision to place international funds in a retirement account.
User avatar
steve r
Posts: 1300
Joined: Mon Feb 13, 2012 7:34 pm
Location: Connecticut

Re: Do you owe tax on the whole foreign dividend even if the fund (like VT) does not get the tax credit?

Post by steve r »

rkhusky wrote: Mon Jan 17, 2022 9:25 am
steve r wrote: Mon Jan 17, 2022 8:45 am For others (not a concern of mine) In taxable accounts. You do miss out on a small tax credit with VT (as opposed to a split). In addition, you have higher expense ratios with VT. Behavioral issues may come into play. For tax management to the max folks, there is a very small benefit by being heavy U.S. in tax deferred accounts with more international in taxable.
Does that also take into account that in recent years international has paid out a higher rate of dividends and that fewer of the dividends are qualified?
No. I was only trying to ballpark it (and even that involved a lot). But that is an interesting question. Not sure if I could find similar information for past years (dividends, tax rates, etc.) So, I looked at International High Dividend Index (VYMI) for 2021. It paid $2.89 in dividends last year. Tax paid by fund rate of .08929. Foreign tax paid of $.258 per share. It traded $70 per share much of the year or .369 basis point equivalent.
"Owning the stock market over the long term is a winner's game. Attempting to beat the market is a loser's game. ..Don't look for the needle in the haystack. Just buy the haystack." Jack Bogle
User avatar
steve r
Posts: 1300
Joined: Mon Feb 13, 2012 7:34 pm
Location: Connecticut

Re: Do you owe tax on the whole foreign dividend even if the fund (like VT) does not get the tax credit?

Post by steve r »

retiringwhen wrote: Mon Jan 17, 2022 9:42 am
steve r wrote: Mon Jan 17, 2022 9:33 am On more observation (perhaps the wrong thread)

https://www.vanguard.com/pdf/RTFTCWS_022021.pdf lists target date funds. I thought I read target date funds cannot get FTC. :?: Any thoughts?

None the less, I did a similar analysis of the FTC equivalent for 2065 fund and it came up with .08 (note it is roughly 36 percent international equities).
Generally, FTC is the least of the problem with TDF in taxable accounts. Just look at realized LTCG and STCG on those funds last year!

TDF are great for retirement accounts where you'd never get the FTC anyway, and one should never let something as small as the FTC impact your decision to place international funds in a retirement account.
Agreed. You can not get both simplicity and effectively tax managed outside of a retirement account.
"Owning the stock market over the long term is a winner's game. Attempting to beat the market is a loser's game. ..Don't look for the needle in the haystack. Just buy the haystack." Jack Bogle
rkhusky
Posts: 17763
Joined: Thu Aug 18, 2011 8:09 pm

Re: Do you owe tax on the whole foreign dividend even if the fund (like VT) does not get the tax credit?

Post by rkhusky »

steve r wrote: Mon Jan 17, 2022 9:44 am
rkhusky wrote: Mon Jan 17, 2022 9:25 am
steve r wrote: Mon Jan 17, 2022 8:45 am For others (not a concern of mine) In taxable accounts. You do miss out on a small tax credit with VT (as opposed to a split). In addition, you have higher expense ratios with VT. Behavioral issues may come into play. For tax management to the max folks, there is a very small benefit by being heavy U.S. in tax deferred accounts with more international in taxable.
Does that also take into account that in recent years international has paid out a higher rate of dividends and that fewer of the dividends are qualified?
No. I was only trying to ballpark it (and even that involved a lot). But that is an interesting question. Not sure if I could find similar information for past years (dividends, tax rates, etc.) So, I looked at International High Dividend Index (VYMI) for 2021. It paid $2.89 in dividends last year. Tax paid by fund rate of .08929. Foreign tax paid of $.258 per share. It traded $70 per share much of the year or .369 basis point equivalent.
I usually ballpark the US dividend at 2% with 95% qualified and International dividend at 3% with 75% qualified. This difference can partially or wholly wipe out the FTC when both are held in taxable. For example, in 2021 it looks to me like VTI had a dividend yield of about 1.3%, whereas VXUS's yield was about 3.1%, a larger gap than normal.

Note too that the FTC is subtracted after AGI is computed, whereas dividends are added into AGI. So, if minimizing AGI is important, then you favor lower dividends, assuming the FTC is canceled out by the larger, less efficient international dividends.
exodusNH
Posts: 10344
Joined: Wed Jan 06, 2021 7:21 pm

Re: Do you owe tax on the whole foreign dividend even if the fund (like VT) does not get the tax credit?

Post by exodusNH »

passive101 wrote: Sun Jan 16, 2022 10:57 pm I'm glad to hear that. I have my Roth IRA in VTWAX and HSA is VT.
In some ways, it's worse in tax-deferred/free. You both don't get the full dividend (part is lost to foreign tax) AND you can't claim the credit.

Ex-US tends to pay more dividends in general. How much of a tax drag that is vs the drag from loss of the dividends due to foreign taxes, I don't know.

Edit: clarified what I meant about not getting the dividend.
Last edited by exodusNH on Mon Jan 17, 2022 11:00 am, edited 1 time in total.
User avatar
steve r
Posts: 1300
Joined: Mon Feb 13, 2012 7:34 pm
Location: Connecticut

Re: Do you owe tax on the whole foreign dividend even if the fund (like VT) does not get the tax credit?

Post by steve r »

exodusNH wrote: Mon Jan 17, 2022 10:10 am ...
In some ways, it's worse in tax-deferred/free. You both don't get the dividend money AND you can't claim the credit.
..
You do get the dividend money (reinvested in my case). Not being able to claim the credit is a drag for sure.
"Owning the stock market over the long term is a winner's game. Attempting to beat the market is a loser's game. ..Don't look for the needle in the haystack. Just buy the haystack." Jack Bogle
exodusNH
Posts: 10344
Joined: Wed Jan 06, 2021 7:21 pm

Re: Do you owe tax on the whole foreign dividend even if the fund (like VT) does not get the tax credit?

Post by exodusNH »

steve r wrote: Mon Jan 17, 2022 10:46 am
exodusNH wrote: Mon Jan 17, 2022 10:10 am ...
In some ways, it's worse in tax-deferred/free. You both don't get the dividend money AND you can't claim the credit.
..
You do get the dividend money (reinvested in my case). Not being able to claim the credit is a drag for sure.
Sorry that I wasn't clearer -- you get the dividend money less the foreign taxes but you don't get to claim the credit.
User avatar
JoMoney
Posts: 16260
Joined: Tue Jul 23, 2013 5:31 am

Re: Do you owe tax on the whole foreign dividend even if the fund (like VT) does not get the tax credit?

Post by JoMoney »

While there are lots of interesting tangents to the taxes on international, I'm still hoping someone will be able to address the main question,
Does the 1099-DIV amount for your international stock fund match the dividend amount you received, or the gross amount (pre-withholding) of the fund?

Maybe we're too early in the tax season to have the forms and account statements needed to verify :?
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
nolesrule
Posts: 2631
Joined: Thu Feb 26, 2015 9:59 am

Re: Do you owe tax on the whole foreign dividend even if the fund (like VT) does not get the tax credit?

Post by nolesrule »

Seems my response on VT was missed. In 2020 The 1099-DIV in my children's taxable accounts holding only VT was equal to the actual distribution amount. That means the dividends reported on the 1099 were net of foreign taxes paid.

Whether that will also be true in 2021 will be unknown until the 1099s are distributed.
Last edited by nolesrule on Mon Jan 17, 2022 11:43 am, edited 2 times in total.
Makefile
Posts: 2657
Joined: Fri Apr 22, 2016 11:03 pm

Re: Do you owe tax on the whole foreign dividend even if the fund (like VT) does not get the tax credit?

Post by Makefile »

nolesrule wrote: Mon Jan 17, 2022 11:13 am whether that will also be true in 2021 will be unknown until the 1099s are distributed.
My 1099-DIV showed up yesterday, but I don't own Total World in taxable.
I suspect based on the annual report that there will be a foreign tax credit on it this year.
User avatar
JoMoney
Posts: 16260
Joined: Tue Jul 23, 2013 5:31 am

Re: Do you owe tax on the whole foreign dividend even if the fund (like VT) does not get the tax credit?

Post by JoMoney »

nolesrule wrote: Mon Jan 17, 2022 11:13 am Seems my response on VT was ignored. In 2020 The 1099-DIV in my children's taxable accounts holding only VT was equal to the actual distribution amount. That means the dividend's reported on the 1099 were net of foreign taxes paid.

whether that will also be true in 2021 will be unknown until the 1099s are distributed.
Thank you. I somehow missed it in the other parts of the thread.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
retiringwhen
Posts: 4743
Joined: Sat Jul 08, 2017 10:09 am
Location: New Jersey, USA

Re: Do you owe tax on the whole foreign dividend even if the fund (like VT) does not get the tax credit?

Post by retiringwhen »

nolesrule wrote: Mon Jan 17, 2022 11:13 am Seems my response on VT was ignored. In 2020 The 1099-DIV in my children's taxable accounts holding only VT was equal to the actual distribution amount. That means the dividend's reported on the 1099 were net of foreign taxes paid.

whether that will also be true in 2021 will be unknown until the 1099s are distributed.
Ding, Ding. I think you gave the most appropriate answer! I don’t have VT in any taxable accounts so can’t provide a datapoint, but this i the most useful answer to Dave’s OP.
User avatar
Topic Author
grabiner
Advisory Board
Posts: 35307
Joined: Tue Feb 20, 2007 10:58 pm
Location: Columbia, MD

Re: Do you owe tax on the whole foreign dividend even if the fund (like VT) does not get the tax credit?

Post by grabiner »

steve r wrote: Mon Jan 17, 2022 9:33 am On more observation (perhaps the wrong thread)

https://www.vanguard.com/pdf/RTFTCWS_022021.pdf lists target date funds. I thought I read target date funds cannot get FTC. :?: Any thoughts?
The IRS rule changed several years ago; funds-of-funds are eligible for the foreign tax credit now.
Wiki David Grabiner
FactualFran
Posts: 2776
Joined: Sat Feb 21, 2015 1:29 pm

Re: Do you owe tax on the whole foreign dividend even if the fund (like VT) does not get the tax credit?

Post by FactualFran »

JoMoney wrote: Mon Jan 17, 2022 11:06 am While there are lots of interesting tangents to the taxes on international, I'm still hoping someone will be able to address the main question,
Does the 1099-DIV amount for your international stock fund match the dividend amount you received, or the gross amount (pre-withholding) of the fund?
My latest experience, from years ago, was that the Total Ordinary Dividends amount on the 1099-DIV was the sum of the dividend payments on the account statement and the Foreign Tax Paid amount on the 1099-DIV.
User avatar
Topic Author
grabiner
Advisory Board
Posts: 35307
Joined: Tue Feb 20, 2007 10:58 pm
Location: Columbia, MD

Re: Do you owe tax on the whole foreign dividend even if the fund (like VT) does not get the tax credit?

Post by grabiner »

FactualFran wrote: Mon Jan 17, 2022 2:25 pm
JoMoney wrote: Mon Jan 17, 2022 11:06 am While there are lots of interesting tangents to the taxes on international, I'm still hoping someone will be able to address the main question,
Does the 1099-DIV amount for your international stock fund match the dividend amount you received, or the gross amount (pre-withholding) of the fund?
My latest experience, from years ago, was that the Total Ordinary Dividends amount on the 1099-DIV was the sum of the dividend payments on the account statement and the Foreign Tax Paid amount on the 1099-DIV.
This is correct if you can take a foreign tax credit, and it is fair. If your fund receives $1000 in dividends and $80 is withheld in foreign tax, you get $920 deposited in your brokerage account, and you get $80 back in foreign tax credit, then pay tax on the full $1000. You thus get the same after-tax return as if there were no foreign tax.

The question which started this thread is what happens if your fund is not eligible for the foreign tax credit.
Wiki David Grabiner
FactualFran
Posts: 2776
Joined: Sat Feb 21, 2015 1:29 pm

Re: Do you owe tax on the whole foreign dividend even if the fund (like VT) does not get the tax credit?

Post by FactualFran »

grabiner wrote: Mon Jan 17, 2022 5:32 pm The question which started this thread is what happens if your fund is not eligible for the foreign tax credit.
In my experience, 1099-DIVs that had a Foreign Tax Paid of zero had a Total Ordinary Dividends amount equal to the sum of the dividend payments on an account statement. The dividend amounts on account statements were net amounts after the foreign tax had been taken.
nolesrule
Posts: 2631
Joined: Thu Feb 26, 2015 9:59 am

Re: Do you owe tax on the whole foreign dividend even if the fund (like VT) does not get the tax credit?

Post by nolesrule »

FactualFran wrote: Mon Jan 17, 2022 7:10 pm
grabiner wrote: Mon Jan 17, 2022 5:32 pm The question which started this thread is what happens if your fund is not eligible for the foreign tax credit.
In my experience, 1099-DIVs that had a Foreign Tax Paid of zero had a Total Ordinary Dividends amount equal to the sum of the dividend payments on an account statement. The dividend amounts on account statements were net amounts after the foreign tax had been taken.
And this is what I also reported for my VT ETF real-world example from 2020 earlier in this thread. Two brokerage accounts for my kids holding only VT. Total Ordinary Dividends on the 1099 were equal to the actual dividend distributions in the accounts.
Makefile
Posts: 2657
Joined: Fri Apr 22, 2016 11:03 pm

Re: Do you owe tax on the whole foreign dividend even if the fund (like VT) does not get the tax credit?

Post by Makefile »

nolesrule wrote: Mon Jan 17, 2022 8:53 pm
FactualFran wrote: Mon Jan 17, 2022 7:10 pm
grabiner wrote: Mon Jan 17, 2022 5:32 pm The question which started this thread is what happens if your fund is not eligible for the foreign tax credit.
In my experience, 1099-DIVs that had a Foreign Tax Paid of zero had a Total Ordinary Dividends amount equal to the sum of the dividend payments on an account statement. The dividend amounts on account statements were net amounts after the foreign tax had been taken.
And this is what I also reported for my VT ETF real-world example from 2020 earlier in this thread. Two brokerage accounts for my kids holding only VT. Total Ordinary Dividends on the 1099 were equal to the actual dividend distributions in the accounts.
So it seems that holding an international (or part-international) fund that doesn't distribute the foreign tax paid to shareholders is like being forced to take the foreign tax as a deduction instead of a credit, except slightly better than that since you don't have to itemize and it's above-the-line so it doesn't increase AGI.

It will be interesting to see if VTWAX/VT indeed have a foreign tax credit this year as I predict.
nolesrule
Posts: 2631
Joined: Thu Feb 26, 2015 9:59 am

Re: Do you owe tax on the whole foreign dividend even if the fund (like VT) does not get the tax credit?

Post by nolesrule »

Makefile wrote: Mon Jan 17, 2022 8:57 pm
It will be interesting to see if VTWAX/VT indeed have a foreign tax credit this year as I predict.
It will be interesting for sure. I'm glad I did not tax gain harvest my kids' accounts all the way up to the $2200 limit, because any increase to the dividends would have created a filing headache.
vasaver
Posts: 359
Joined: Fri Oct 19, 2012 2:15 pm
Location: Virginia

Re: Do you owe tax on the whole foreign dividend even if the fund (like VT) does not get the tax credit?

Post by vasaver »

Makefile wrote: Sun Jan 16, 2022 6:39 pm The VTWAX annual report suggests there is a foreign tax credit coming this year:
Special 2021 tax information (unaudited) for Vanguard Total World Stock Index Fund

This information for the fiscal year ended October 31, 2021, is included pursuant to provisions of the Internal Revenue Code.

The fund distributed $441,312,000 of qualified dividend income to shareholders during the fiscal year.

The fund distributed $11,391,000 of qualified business income to shareholders during the fiscal year.

For corporate shareholders, 32.7% of investment income (dividend income plus short-term gains, if any) qualifies for the dividends-received deduction.

The fund designates to shareholders foreign source income of $367,125,000 and foreign taxes paid of $32,300,000. Shareholders will receive more detailed information with their Form 1099-DIV in January 2022 to determine the calendar-year amounts to be included on their 2021 tax returns.
Bumping this thread - did anyone get 1099-DIV in January 2022?
nolesrule
Posts: 2631
Joined: Thu Feb 26, 2015 9:59 am

Re: Do you owe tax on the whole foreign dividend even if the fund (like VT) does not get the tax credit?

Post by nolesrule »

vasaver wrote: Mon Feb 07, 2022 6:28 pm
Makefile wrote: Sun Jan 16, 2022 6:39 pm The VTWAX annual report suggests there is a foreign tax credit coming this year:
Special 2021 tax information (unaudited) for Vanguard Total World Stock Index Fund

This information for the fiscal year ended October 31, 2021, is included pursuant to provisions of the Internal Revenue Code.

The fund distributed $441,312,000 of qualified dividend income to shareholders during the fiscal year.

The fund distributed $11,391,000 of qualified business income to shareholders during the fiscal year.

For corporate shareholders, 32.7% of investment income (dividend income plus short-term gains, if any) qualifies for the dividends-received deduction.

The fund designates to shareholders foreign source income of $367,125,000 and foreign taxes paid of $32,300,000. Shareholders will receive more detailed information with their Form 1099-DIV in January 2022 to determine the calendar-year amounts to be included on their 2021 tax returns.
Bumping this thread - did anyone get 1099-DIV in January 2022?
Yes. My kids' VT ETF had 0.00 foreign taxes paid, and the total ordinary dividends matched the dividend distributions. There were Section 199A dividends equal to about 1.6% of the total ordinary dividends.
calwatch
Posts: 1447
Joined: Wed Oct 02, 2013 1:48 am

Re: Do you owe tax on the whole foreign dividend even if the fund (like VT) does not get the tax credit?

Post by calwatch »

So bottom line, the difference is either taxes are deducted from VXUS, VEA, etc. and pay taxes on the phantom income and then take the deducted taxes as a foreign tax credit, or you never receive the income in the first place, like with VT? So the foreign tax credit, provided you can take advantage of it, is worth more because that's cash which can be applied towards your taxes, as opposed to not receiving the income in the first place.

To figure out this, suppose there is $300 of foreign taxes paid, that $300 shows up on 1099-DIV and is taxed at a non-qualified rate, which hypothetically is 32%, plus the state rate, which in this case we'll use 8%, for 40% taxes or $120, but you take the $300 FTC instead, for a net credit of $180.
If VT paid $300 in foreign taxes, it would never show up on 1099-DIV in the first place so the net benefit is zero. Is this the hidden international stock advantage?

And for a tax deferred/Roth account holding VXUS, you don't get the foreign tax credit for those shares, but you also don't pay taxes on the phantom income in the first place.
yobery
Posts: 446
Joined: Thu Jan 20, 2022 11:27 pm

Re: Do you owe tax on the whole foreign dividend even if the fund (like VT) does not get the tax credit?

Post by yobery »

calwatch wrote: Fri Feb 18, 2022 6:02 pm So bottom line, the difference is either taxes are deducted from VXUS, VEA, etc. and pay taxes on the phantom income and then take the deducted taxes as a foreign tax credit, or you never receive the income in the first place, like with VT? So the foreign tax credit, provided you can take advantage of it, is worth more because that's cash which can be applied towards your taxes, as opposed to not receiving the income in the first place.

To figure out this, suppose there is $300 of foreign taxes paid, that $300 shows up on 1099-DIV and is taxed at a non-qualified rate, which hypothetically is 32%, plus the state rate, which in this case we'll use 8%, for 40% taxes or $120, but you take the $300 FTC instead, for a net credit of $180.
If VT paid $300 in foreign taxes, it would never show up on 1099-DIV in the first place so the net benefit is zero. Is this the hidden international stock advantage?

And for a tax deferred/Roth account holding VXUS, you don't get the foreign tax credit for those shares, but you also don't pay taxes on the phantom income in the first place.
First, not all foreign income is unqualified. Second, VT does get the FTC in about 40% of the years or something. Third, with foreign in a Roth, you're still paying the Foreign taxes, the fund does it on the back end before you see your docs.

One year, do your taxes both ways, assuming VTI in taxable, vs VXUS in taxable, and see how you fare. I was multiple hundreds of dollars ahead the year I ran those numbers, and chose foreign in taxable.
Global100
Posts: 228
Joined: Wed Dec 27, 2017 7:46 pm

Re: Do you owe tax on the whole foreign dividend even if the fund (like VT) does not get the tax credit?

Post by Global100 »

yobery wrote: Fri Feb 18, 2022 6:27 pm Second, VT does get the FTC in about 40% of the years or something.
From a thread viewtopic.php?f=10&t=237427 about VT and FTC in taxable accounts:
Risk seeker wrote:An ETF is only permitted to pass through foreign tax credits (FTCs) to its shareholders if more than 50% of the value of the ETF's assets is invested in non-U.S. corporations on December 31. IRC Sec. 853(a)(1).

VT's "Statement of Additional Information" states "if, at the close of its fiscal year, more than 50% of a fund’s total assets are invested in securities of foreign issuers, the fund may elect to pass through to shareholders the ability to deduct or, if they meet certain holding period requirements, take a credit for foreign taxes paid by the fund." Page B-20 of VT's SAI.
VTI
Posts: 282
Joined: Sat Mar 13, 2021 11:56 pm

Re: Do you owe tax on the whole foreign dividend even if the fund (like VT) does not get the tax credit?

Post by VTI »

Global100 wrote: Sat Feb 19, 2022 1:31 pm
yobery wrote: Fri Feb 18, 2022 6:27 pm Second, VT does get the FTC in about 40% of the years or something.
From a thread viewtopic.php?f=10&t=237427 about VT and FTC in taxable accounts:
Risk seeker wrote:An ETF is only permitted to pass through foreign tax credits (FTCs) to its shareholders if more than 50% of the value of the ETF's assets is invested in non-U.S. corporations on December 31. IRC Sec. 853(a)(1).

VT's "Statement of Additional Information" states "if, at the close of its fiscal year, more than 50% of a fund’s total assets are invested in securities of foreign issuers, the fund may elect to pass through to shareholders the ability to deduct or, if they meet certain holding period requirements, take a credit for foreign taxes paid by the fund." Page B-20 of VT's SAI.
There is an exception for funds-of-funds like iShares' AOR. As far as I know, no matter how small the international allocation, funds-of-funds always report Foreign Tax Paid on their 1099-DIV.

Thus, if VT simply held VTI+VXUS at market cap weights, holders could enjoy the foreign tax credit.
Also available as an Admiral™ Shares mutual fund.
Post Reply