Foreign Tax Paid

[codybear]

Hi Mark:

One of the reasons I use FM is for tax reporting. I like to use FM to keep track of the tax basis (FIFO) and also compare the distributions with my schedule B. The problem that I have is that the schedule B totals do not match the distributions (Div+STCapGn) because of the foreign taxes paid. I was thinking of possibly recording the foreign taxes paid as MT Cap Gain (non-reinvested) and that way the (Div+STCapGn+MTCapGn) should equal part II of schedule B. Testing this didn't seem to effect the cost basis. Do you think this should work, or is this going to cause some other type of miscalculation? I'm thinking of using MT Cap Gain as it is an unused field.

Jamie

[Mark]

Hi Jamie,

Recording these as MT Cap Gain will not affect your tax cost basis. Only when you record a purchase (or reinvestment) does your tax cost basis change. The MT Cap Gain will affect the reported performance (ROI Yield). If you're recording this as a positive valued distributed distribution the ROI will increase, as it appears the investment earned you some additional money. You could record it as a negative valued distribution, and this will lower your ROI. In this case the reported ROI will take into account the foreign taxes paid (like an account fee distribution).

[codybear]

Thanks Mark for your answer. The negative is probably best and maybe I'll use the "Other" type distribution for my foreign taxes, which leaves MT Cap Gain available in case Congress creates a 3rd category.

Jamie

[Tintin]

I need to get this straight in my mind.

I get a dividend, then I get a deduction for foreign taxes on that dividend. I take a foreign tax credit on my taxes. How should I handle this in FM?

==== Foreign Tax Entry action step =================
Enter the Foreign Tax Paid under [Distributions (all)] as an [Other Distribution] and enter a negative number for the tax paid, along with a comment to explain the entry?
========================================

In the past, I entered a negative number as "Account Fees" and entered a comment to explain the entry.

Please advise. Thanks

-= Chris =-

[Mark]

Hi Chris,

Whether you want to track foreign taxes deducted from your dividends is sort of a personal preference. If you track these as negative distributions, they will reduce your reported performance, by the amount withheld. In general you don't record taxes you pay into Fund Manager, so all performance figures are pre-tax. Foreign taxes paid may be something you want to record though. If you do want to record them I would recommend recording them as a negative "Other" distribution. I would not use the "Account Fee" distribution type, as these distribution types are treated special. They increase your tax cost basis.

[Tintin]

Thank you Mark. Yes, taxes paid to a foreign country actually do reduce the performance of the equity and the overall portfolio.

AFAIK, and what I have been doing, is to report the whole dividend - prior to the tax witheld - and then taking either a tax deduction or a tax credit. Of course a tax credit is the way to go. Unfortunately, depending on your individual situation, and the country withholding, there are cases where you are paying taxes in a 'ghost' amount, effectively double taxation, or taxation on monies you have no received.

OT: But hey, this is where we are going. In NJ, some stores use coupons or rebates as a sales promo, but the state taxes you on the full price BEFORE the sales price if labeled as: "Manufacturer's rebate"! The issue is that the stores pay the state on their gross sales, and many of these rebates are not mailed in, but taken at the register. Today we are not talking about 50 cents, but rebates of $25-$100! So, is the state getting it, or is the store keeping the 'extra profit"?? Imputed income, and now imputed expenses that are taxes, yet you do not see the income, nor do you actually spend that amount.

BTW, I do not know how old you are, but the US coupon issue dates back to the Nixon era when wages & prices got frozen... so watch carefully what will be happening over the next 1-2 years... <g>

[elliots]

Was browsing issues and saw this -- let me put in my$.02 worth:

Foreign taxes paid (FTP)should not reduce the ROI of the investment in Fund Manager. After all, you will pay US taxes on your other stock dividends and you don't reduce the ROI reported by Fund manager (if you do, stop reading here). FM is giving you pre-tax ROI and that's what you should want. After-tax returns are what's really important, but you can't get them out of a single software program like FM (you would have to build in a complete tax calculation package to account for each client's tax situation separately).

Over the years I've finally come to the following solution for FTP issues in portfolio management software. You record the full dividend (that's what the investment paid and figures in the investment's return and the portfolio ROI), and consider the FTP as a cash withdrawal (not any kind of fee or expense) from the portfolio. The broker/fund took the money from you (your account) and made a payment on your behalf to the taxing authorities. That payment was your obligation and money was withdrawn from your portfolio to pay it. If you don't do it this way, what do you do about dividends in your other accounts? Reduce the ROI for the taxes you will pay later?