The response I gave may be only partially correct:

I wrote in message newsbQXc.8876$QJ3.5568[at]newssvr21.news.prodigy.com...
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More accurately, this would correspond to a *deduction* equal to the foreign
tax paid. That's perfectly reasonable if one regards foreign taxes as a
cost of doing business, just like any other fund expense (like commissions).
And when taken as a deduction, your net income in a taxable account (here,
$10) is the same as the net income in a tax-deferred account.

But the tax code goes a step further in allowing you to take a credit (in a
taxable account). This credit is worth more than the deduction, so you can
come out ahead in a taxable account:

With $11 income including $1 in foreign taxes, and a 25% tax bracket, you
would owe 25% * $11 = $2.75, against which you would take a $1 credit, and
thus owe $1.75 (leaving you with $10 - $1.75 = $8.25).

If you took the deduction, you would show $11 - $1 = $10 income, and you
would owe $2.50 (and be left with $7.50). And that is the same effect as
you would have when you withdrew the $10 from a tax-deferred account. So
you don't recoup *all* the foreign tax, but you do recoup *some* of it.

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"Ed" <friday[at]fishinthe.net> wrote in message
news:10iuj7nnvv2jgd1[at]corp.supernews.com...
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The foreign tax paid is, in one sense, just another expense of the fund.
The value of your investment is the gain (appreciation, dividends) from the
underlying securities less all the fund expenses, whether they be operating
expenses, foreign taxes, trading costs, etc.

For tax purposes, most fund expenses, whether the shares are in a tax
shelter or not, are simply netted out - your income is the gain, net of
expenses. (For simplicity, I'm ignoring realized vs. unrealized gain.)

Foreign taxes OUTSIDE of a tax shelter are treated differently (i.e. the odd
case is the non-retirement account). These taxes show up as income on paper
on your 1099, and only there. So, on paper, you show more income than you
really got. Compare the (real) dividends paid to you during the year
against the dividends declared on the 1099. The 1099 income will be higher
than your real income (fund distributions) by the amount of foreign taxes
paid.

For example, if the fund distributed $10 in (real, cash) dividends, but also
paid $1 in foreign taxes, your 1099 shows dividends of $11 (as if you got
the $11 of dividends, and then the fund took $1 out of your pocket to pay
the taxes for you). There is no 1099 in a retirement account, and no extra
paper gain. You just pay taxes on the real $10 gain when you cash out your
sheltered account.

To balance the extra $1 on your 1099, the tax code allows you to take a
credit equaling the $1 paper gain from the foreign tax. So in a taxable
account, you wind up paying taxes only on the actual increase in value of
the investment. Same as for the sheltered account.

--
Mark Freeland
nBeOwXs[at]pacbell.net

Ed wrote:
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Ed,
The foreign tax credit applies to income that is taxable in the current
tax year in both the US and another country. Because your dividends and
interest in the IRA (if that's what it is) isn't US-taxable income in
the current year you can't claim the credit.

IRS Pub 514 talks about the credit and how to apply it (www.irs.gov).
There's an incentive to hold ADRs & whatnot in your taxable accounts, so
you get the credit.

What about a year in which you've had foreign tax withheld and you do a
full distribution of the entire IRA balance? Good question - I have no
idea and I wonder if it's ever come up.

-Tad

"HW "Skip" Weldon" <skip5700removethis[at]hotmail.com> wrote

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Skip, I think you lose it. Sometimes it's a significant amount and it caused
me to wonder if international funds that make hefty distributions are worth
keeping in a retirement account.

On Wed, 25 Aug 2004 10:07:14 CST, "Ed" <friday[at]fishinthe.net> wrote:

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This sure stumps me. Hopefully someone has the answer and will
respond.

-HW "Skip" Weldon
Columbia, SC

If you invest in international stock and bond funds within a tax deferred
retirement account is there a way to recoup the foreign tax paid?