I have updated the wiki article: Foreign tax credit to clarify what happens with tax-deferred accounts (tax credit does not apply). The previous version provided a brief explanation, but it was somewhat unclear to me and I missed the point.grabiner wrote: ↑Sat Oct 01, 2022 5:33 pmDistributions from an IRA are not eligible for the foreign tax credit, since the income taxed by the foreign country (the dividend) was not taxed by the US, and conversely the income taxed by the US (the IRA withdrawal) was not taxed by the foreign country. The credit applies to dividends on a fund held in a taxable account. (For example, if you take an RMD from an IRA stock fund, and don't need to spend it, you can invest the distribution in a taxable stock fund. If that taxable fund is a foreign tax fund, you will get the foreign tax credit.)LadyGeek wrote: ↑Sat Oct 01, 2022 1:30 pm I don't have any experience with Foreign tax credit and will take your word for it. In any case, this is all in the tax-deferred account. It would matter when distributions are taken as taxable income.
Can the experts please review?
I got stuck on the example: Example of how it affects your taxes
I got the $820, but I don't understand the sentence I underlined. Should the last part of the 2nd paragraph instead be worded like this?Say that you hold an international stock fund. The stocks in the fund earn $1000 in dividends, but foreign countries withhold tax of $70 of those dividends. Therefore, the fund only pays you $930 in dividends; this is what you will receive if you hold the fund in a tax-advantaged account.
Now say that you hold the fund in a taxable account, you are in a 25% tax bracket, and 70% of the dividends are qualified. Your Form 1099-DIV reports $1000 in dividends, $70 in foreign tax withheld, and $700 in qualified dividends. When you do your taxes, you will owe tax on the full $1000 in dividends; 15% of the $700 qualified dividend and 25% of the $300 non-qualified dividend is $180. However, you can then take a credit for the $70 foreign tax (assuming no limitations apply), so your total tax bill is only $110. You have $820 after tax, just as if you had received the full $1000 and there had been no foreign tax withholding.
I don't understand "just as if you had received the full $1000 and there had been no foreign tax withholding." because I don't see how the numbers work out to $820 as described. What am I missing?Say that you hold an international stock fund. The stocks in the fund earn $1000 in dividends, but foreign countries withhold tax of $70 of those dividends. Therefore, the fund only pays you $930 in dividends; this is what you will receive if you hold the fund in a tax-advantaged account.
Now say that you hold the fund in a taxable account, you are in a 25% tax bracket, and 70% of the dividends are qualified. Your Form 1099-DIV reports $1000 in dividends, $70 in foreign tax withheld, and $700 in qualified dividends. When you do your taxes, you will owe tax on the full $1000 in dividends; 15% of the $700 qualified dividend and 25% of the $300 non-qualified dividend is $180. You have $820 after tax, just as if you had received the full $1000 and there had been no foreign tax withholding.
However, you can then take a credit for the $70 foreign tax (assuming no limitations apply), so your total tax bill is only $110.
Can an expert please provide a better explanation (or correct what's wrong)?