Late night reply: "The problem in holding these trusts in an IRA is that the canadian withholding of 15% is lost. So you lose 15% of the dividends to thin air. But if held in a taxable account, that foreign tax withheld is a US tax credit."
For me, I've found that not to be true.
Regarding USA taxes, married filing jointly, and with under $600 dollars in foreign taxes paid (to countries USA has agreements with like Canada, Brazil, Spain, etc.), you have two ways to recoup: simple form/computer (Turbotax) to claim the under $600 amount as an offset to Federal taxes, or else simply take those tax credits as a deduction. (This latter not so good: a credit to taxes is much better than a deduction.)
Now...same situation but the investor has OVER $600 in foreign taxes paid. Two alternatives: the not-so-good one of taking the amount as a deduction. Very simple again (just plop the amount on the designated line in the form) The second: trying to take that over $600 amount as a credit to taxes. Now that alternative is NOT simple or easy. You do not get the easy line fillout as with the under $600 amount. You MUST fill out Form 1116. IT IS A BEAR! You enter line items from worksheets and other referenced forms (e.g. on line 17: "Enter the amount from line 1041 (minus any amount on Form 8914 line 6)" and then this: "caution: If you figured your tax using the lower rates on qualified dividends or capital gains, see page 16 of the instructions". You have to figure capital gains or losses long-term vs. short-term for the foreign stocks you might have sold. Or maybe it's for the USA stocks after subracting the foreign stocks in each of these categories. (I can't tell.)
So here's what I did and found. I have over $1000 in foreign tax credits in taxable accounts:
If I ask Turbotax to place the $1000+ amount as a deduction, it does it quickly and easily. However, for the alternative choice,
TurboTax gives me this error when I ask it calculate the credit amount method:
"YOU MUST FIX THIS ERROR."
"Form 1116 (Copy 1)--Foreign Tax Credit Comp Wks: Adj. Basis Fgn Inv Assts entered. Adj Basis Fgn Inv Assets...."
Well thank you very much. Impossible for me to understand what is asked for.
So I go to my tax accountant. He has a very good computer program. I say I have a couple of problems (K-1's being one).
Here's all my tax info. and my records, I am befuddled about what to do, how to do Form 1116. You figure it out. Run your program. See what you can do with 1116. He smiles, takes down pertinent info, collects my Sch D's. Two days later I have my new Fed Tax forms done. Form 1116 completed. I get a tax credit of $88 dollars. $88!!! Now that is less than the $600 I'd get if I only had $600 in foreign taxes paid. (And why didn't the computer allow/override the first alternative? (a deduction for $1000+ is worth more to me than a credit of $88.)
Ah, so now I'm like the guy with two watches. He never knows the correct time. I got two different 1040's from the two different computers.
Well, somebody is wrong somewhere.
Here's a possible point. Maybe for you Grommit - did you once say you were an accountant/finance guy? -- you can get the max benefit of having these trusts in a taxable account. For me, I'm suspicious that I can get what others perceive as a simple credit ... based on my experience and situation. I have these trusts in both taxable and non-taxable accounts. I'm willing to lose the 15% Canadian trusts taxes in non-taxable accounts if the dividends are high enough. Almost worth it to me rather than having issues with the things in taxable accounts.
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Received an updated brokerage report Monday (filing day) which moved some 1099 dividend income to the non-taxable distribution box. Jeez I am not going to like having to file amended returns. I want to start now on 2007 income/gains/losses/deductions. This is all so non-productive for me. grrrr. |
