On Apr 11, 4:21 pm, "Mark Freeland" <BnetOne...[at]sbcglobal.net> wrote:

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..

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Thanks a lot for the explanation!

Anoop

"anoop" <ghanwani[at]gmail.com> wrote in message
news:1176328560.306226.62480[at]b75g2000hsg.googlegroups.com...
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Suppose a fund makes $24, and pays a foreign government $4 in taxes. Then
it distributes the remaining $20 to you, which you reinvest. So far, that
comports with your understanding.

This same thing happens ($20 "real money" reinvested) whether the fund is in
a taxable account, or a tax-deferred account.

Your original statement was that you "assume [the foreign tax paid] is just
lost money if the fund is owned in a tax deferred account." Okay, your
assumption was correct. But drawing a distinction between taxable and tax
deferred may not have been accurate. It depends on how you handle the
foreign taxes.

In a tax-deferred account, your investment went up by $20. So when you
finally withdrew it, you would pay taxes on $20, say $5 (assuming a 25%
bracket), leaving $15.

In a taxable account, assuming that you take a deduction for the foreign
taxes, you would declare $24 in income, deduct $4, and pay the tax on $20,
leaving $15. No difference. Lost money, either way.

However, if you were to take a tax credit (which is only possible in the
taxable account), you would declare $24 in income, owe $6 in taxes (25%),
and get a credit for $4, leaving you with $2 in taxes to pay, and $20 - $2 =
$18 in after-tax profit.

The foreign tax credit is only way to avoid losing money. Basically, Uncle
Sam is reimbursing you for the taxes you paid to another country when you
file your tax return. But only if you take the tax credit. Take the
deduction, and there's no difference between a taxable and a tax-deferred
account. Then they both lose the same amount of money.

Mark Freeland
BnetOnewsX[at]sbcglobal.net

On Apr 11, 12:47 pm, "Mark Freeland" <BnetOne...[at]sbcglobal.net> wrote:

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I don't understand this. I assume payment of foreign taxes by the
fund necessarily reduces reinvested dividends. That is lost money!

Anoop

"Rich Carreiro" <rlcarr[at]animato.arlington.ma.us> wrote in message
news:m3r6qqu4u6.fsf[at]animato.home.lan...
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I don't think it is lost money if one is comparing the tax-sheltered
investment vs. taking a deduction (not a tax credit) in a taxable account:

In a taxable account, the reported distribution is increased above the
"real" distribution by the amount of foreign taxes paid. If you take a
deduction, that reduces the net income you show on your tax return down to
the "real" distribution.

In a tax-deferred account, all that matters is the "real" money that the
investment made. There's no paper distribution of foreign tax.

Of course, if you are taking a tax credit, that's different. I don't know
any situation where a tax credit comes out worse than a deduction (though if
your credit is more than $300 single/$600 married, the pain of filling out
form 1116 for an EAFE fund - 21(?) countries - may not be worth it).

Mark Freeland
BnetOnewsX[at]sbcglobal.net

"anoop" <ghanwani[at]gmail.com> writes:

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Yes, they do.

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Yes, it is.

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

Does anyone know if EAFE index funds have a foreign tax liability?
If there is, I assume this is just lost money if the fund is owned in
a tax deferred account.

Thanks,
Anoop