Over at Bogleheads we read: Domestic vs international for taxes
Dec 27, 2013 2:04 am
I know I am probably splitting hairs here but which fund would be more tax efficient? Vanguard Total International Stock Index (VTIAX) or Vanguard Total Stock Market Index (VTSAX). I am in the 15% tax bracket and will be investing $11k in the IRA. There will be 3 times as much international fund and 6 times as much stock market fund in the taxable account (compared to the IRA) if that helps to make a recommendation.
I am starting a spousal IRA this year and increasing my taxable account and would like to know which fund to put in the IRA. Most of the dividends from the domestic account would be qualified and probably about 70% of the international would be (I would guess). However, the international account would qualify for the foreign tax credit. So, I'm guessing it's a coin flip but would like to hear what everyone here thinks, maybe I am way off. Thanks.
-BA
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Re: Domestic vs international for taxes
by livesoft »
Fri Dec 27, 2013 2:15 am
In 2012, Total International was slightly more tax efficient for someone in the 15% marginal income tax bracket. However, Total Stock Market was slightly more tax efficient for someone in the 25% marginal income tax bracket.
The numbers may be different for 2013.
It's all about market timing, uh, I mean rebalancing, uh, I mean opportunistic rebalancing, uh, I mean short-term opportunistic rebalancing due to a short-term change in one's asset allocation.
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Fund tax-efficiency ?
by Taylor Larimore » Fri Dec
27, 2013 9:26 am
livesoft wrote:In 2012, Total International was slightly more tax efficient for someone in the 15% marginal income tax bracket. However, Total Stock Market was slightly more tax efficient for someone in the 25% marginal income tax bracket.
livesoft:
Why does a person's marginal income tax-bracket change the two funds "tax efficient" rank?
Thank you and Happy Holiday!
Taylor
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Re: Domestic vs international for taxes
by
TheGreyingDuke » Fri Dec 27, 2013 9:47 am
I am hazarding a guess that the difference was in capital gains, which are not taxed in the 15% bracket
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Re: Domestic vs international for taxes
by
Boglenaut » Fri Dec 27, 2013 9:50 am
Taylor,
Total International has a tax credit for foreign taxes paid... you get 100% back. The rates you pay on dividends/gains depend on your bracket but is only a fraction. So someone in a low bracket could pay 0% on the distributions but get 100% back on the foreign credit. Someone in a very high bracket may pay 20% or more on the distributions but get 100% back on the foreign tax credit. The break-even point depends on the amount of the credit and the amount and types of distributions.
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Re: Fund tax-efficiency ?
by livesoft » Fri Dec 27,
2013 3:42 pm
Taylor Larimore wrote:Why does a person's marginal income tax-bracket change the two funds "tax efficient" rank?
Thank you and Happy Holiday!
Taylor
I have a spreadsheet with 2012 distributions for these funds including fraction of qualified/non-qualified dividends and foreign taxes paid. The two funds are quite close in taxes owed on distributions from say $10,000 worth of shares.
Since Total Stock Market had 100% qualified dividends in 2012, a person in the 15% tax bracket would pay $0 on the dividend. However, for Total Int'l the dividend was higher and the foreign tax-credit would have covered ones US tax on the non-qualified dividends plus a little bit more. This assumes one only had a small tax credit and did not have to fill out long-form From 1116 which would limit the credit.
In the 25% tax bracket, the extra 10% tax on the non-qualified part of the total int'l dividend overwhelms the foreign tax credit that one would receive and thus total int'l is less tax-efficient.
But the numbers are really so close that it really doesn't matter which of these two funds someone in low tax brackets uses. It is interesting that one's tax bracket appears to matter. And also any small change in fraction of non-qualified dividends changes things, too. Thus, 2013 could be different from 2012.
It's all about market timing, uh, I mean rebalancing, uh, I mean opportunistic rebalancing, uh, I mean short-term opportunistic rebalancing due to a short-term change in one's asset allocation.
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Re: Domestic vs international for taxes
by abuss368
» Fri Dec 27, 2013 3:59 pm
gte939h wrote:I know I am probably splitting hairs.....
-BA
You probably are! When experts disagree it probably does not make much difference.
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Re: Domestic vs international for taxes
by gte939h
» Fri Dec 27, 2013 4:03 pm
Livesoft, thank you for the response and in depth analysis. I was hoping someone had those numbers, it certainly seems to be a coin flip. However, since I am in it for the long term I think I will make my decision assuming I will move up in tax brackets and incur more capital gains tax in the long run. Thanks again!
-BA
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Re: Fund tax-efficiency ?
by ajcp » Fri Dec 27,
2013 4:12 pm
livesoft wrote:But the numbers are really so close that it really doesn't matter which of these two funds someone in low tax brackets uses. It is interesting that one's tax bracket appears to matter. And also any small change in fraction of non-qualified dividends changes things, too. Thus, 2013 could be different from 2012.
Yea I occasionally see people wanting to reduce taxable income to get themselves from say the 28 to the 25% bracket and think that's not worth worrying about, but the difference between 25 and 15 can be pretty significant. I was actually asking myself and my accountant this exact question a couple weeks ago. I couldn't really get an answer since I can see past VTIAX dividends, but I don't know if I can get foreign tax credit information for any past year unless I just bought the fund in taxable and waited for my 1099. As gte said, it's kind of splitting hairs, for me I figured out that I would have only paid roughly $30 in taxes using 2013's dividends, and that assumes $0 foreign tax credit. For that little, I decided to take the gamble buy it in taxable just for the "hands on" education on how the foreign tax credit works.
Edit: On second thought, I don't think the reason tax bracket matters is the capital gain rate difference. I believe the difference is because it's a credit, and not a deduction, so it will be more beneficial to lower tax brackets.
Last edited by ajcp on Fri Dec 27, 2013 4:38 pm, edited 1 time in total.
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Re: Domestic vs international for taxes
by livesoft »
Fri Dec 27, 2013 4:19 pm
Foreign tax credit info is available:
I wonder if one can replace the "2012" text with other years? A quick test says the answer is "Yes!"
It's all about market timing, uh, I mean rebalancing, uh, I mean opportunistic rebalancing, uh, I mean short-term opportunistic rebalancing due to a short-term change in one's asset allocation.
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Re: Domestic vs international for taxes
by gte939h
» Fri Dec 27, 2013 4:24 pm
Nice! That will be helpful in the future, thanks.
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Re: Domestic vs international for taxes
by Taylor
Larimore » Fri Dec 27, 2013 4:37 pm
Lifesoft (and others)
Thank you for the explanation of how one's tax-bracket can affect a fund's tax-efficiency.
Happy Holiday!
Taylor
"The Majesty of Simplicity" -- Jack Bogle
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