I have avoided limited partnerships because the tax related stuff was onerous. How about in a Roth IRA. Since it is tax free, do I have to do all the tax reporting on it?
What about foreign investments in a Roth; do I lose the foreign tax credit for investments in a Roth?
Thanks
I thought most of the tax burden is on the limited partnership. They just issue you a Schedule K, and you report what they tell you to report.
Since income in IRAs is not taxed when received, my understanding is that you don't get the benefit of any tax credits, deductions etc., because there is no tax to reduce.
There's nothing really good about a foreign tax credit in the first place, so losing one is not necessarily a bad thing.
A few years back I had a natural gas ETF and the K1 took me 2 hours to enter, and I had to make wild guesses on some of the entries. (only a few dollars involved...) The following year I used an accountant (for reasons other than the K1) and he billed me 3 hours for entering it. I am sure the general partner does 98% of the work, but the other 2% is still a lot of work.
Since then I have avoided them, but if nothing is necessary for a Roth, then might revisit it.
If it's in a taxable account, why wouldn't you credit it against your tax? I realize there's passive investment limitations, but I usually have some credits from foreign stocks that I can use.
It reduces your US tax. How is that not good?
Use line breaks so people can send a reply!
You can't just move the ROTH thing around --- the source of the investnent must know it's a Roth. The tax load is not bad --just the year end balance,and any additions/withdrawals, as I recall, are all that's reported
My comment was a little off target for the original question, so first I'll explain my comment, then come back to the OP.
What I meant was, since the FTC is simply a mechanism to avoid double-taxation, you'd be as well or better off avoiding the double taxation in the first place and not getting the credit. It's not like the FTC is a tax break of some kind, or a reduction in overall taxes. Getting an FTC just means you had to go through more work to get the same end result on your tax return. (Yes, I realize there are special cases where FTC can be used as a tax planning tool, I have an entire tax education course on this topic, but most individual taxpayers are not able to use the sophisticated techniques that corporations, for example, might use).
Back to the OP, as Stuart already pointed out, since in a Roth there is no chance of double-taxation, there is no FTC to eliminate it. So yes, one "loses" the FTC in a Roth. In a traditional IRA, by contrast, you essentially get a foreign tax deduction instead of a credit, because the foreign taxes paid out of your Trad IRA account are not going to be taxed by the US when you eventually take a distribution.
Contrast to an ordinary dividend-yielding account, where you are taxed by the US on the income that was used to pay the foreign tax.
The conventional wisdom is to not let the tax tail wag the dog -- if certain foreign investments make sense inside a Roth as part of one's overall financial planning, losing a relatively small amount to foreign taxes should not be the driving factor.
How do you avoid the foreign tax, other than not making foreign investments that might be taxed in the country of origin?
I mostly invest in mutual funds, and some of my funds are international. They end up paying foreign taxes, and when tax time comes along they tell me how to calculate the foreign tax paid. The only choice I have is between taking this as a credit or deduction.
What this means is that there's a little less benefit to holding international investments in a Roth IRA, because the foreign country doesn't consider it tax-free.
But there are some situations where it makes sense. For instance, there's not much reason to invest in tax-free bonds in an IRA.
On 2015-05-26 10:42, Barry Margolin wrote: [...]
I'll try one last time -- some, if not most, credits are Good Things because they reward you on your tax bill for certain actions - adopting a child, getting a college education, adding energy-saving features to your house. A few, like the Excess Soc. Security withholding credit, or the FTC, don't really reward you for anything, they just offset what would otherwise be an unintended bad result of doing certain things, like changing jobs mid-year, or investing in a mutual fund with international holdings.
As a tax preparer, I could see myself telling a client, "Good news, you got an education/adoption/earned income/etc credit this year, so your tax liability went down compared to last year". I can't see myself saying, "Good news, you got an FTC credit this year, so nothing really changed from last year regarding your overall (domestic and foreign) tax liability."
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