Foreign Tax Credit carryover

[RunningBum]

Some questions, and perspective, on the foreign tax credit. Please help with your suggestions.

I pay $1500 per year in foreign taxes on dividends on a passive investment (VG Total Intl) in my taxable account. In the past I've been able to use the foreign tax credit (FTC) most years, but in trying to keep the ACA subsidy, my total tax is now very low and I get very little back in the credit. It looks like the next 8 years will be like this unless tax laws change, or I choose to or have to skip the ACA credit any of those years. After that I'll be 65 and on medicare. Fortunately I can carry over the FTC for up to 10 years, but I don't think I can use them all in that time. I've used the carry back one year credit already.

Once I hit 65 and stop worrying about the subsidy, I'll make a larger Roth conversion, get a small pension, and eventually start social security. I estimate I'll have room each year for about $2400 FTC, so I can take some of the carry over each year.

From a trail run in TurboTax, it looks like you use the current year FTC, then start using the oldest carryovers next. I was hoping they'd use the carryover before the current year, in which case I should be able to eat away at the whole carry over, but that doesn't seem to be the case. Is that correct? At this rate, it looks like I could lose about 40% of my current FTC carryover, maybe more since my holdings and dividends will probably increase.

So my main question is, should I do anything about it? It irks me to lose hundreds of dollars of credits each year.

I have gains on all of my VTIAX shares, so selling any significant share would cost me my ACA subsidy, which is more than the FTC. I could start selling it off at age 65, at least enough to be able to use the oldest FTC about to roll off.

I like the diversification that holding VTIAX gives me. I know that anything bad that happens to the US economy affects the world economy, but it could be to a lesser extent. So I'm not especially keen to sell, though I am a little overweight on internationals right now.

Is this just a matter of not letting the tax tail wag the dog? The foreign tax paid amounts to about 0.2% of my overall international holdings. I could view that as a yearly expense to holding the fund. What I'd lose is about 0.1% That would increase my expense ratio of VTIAX to about 0.20%, a lot less attractive than the current 0.11%. But maybe not that bad?

My current thought is to try to reduce VTIAX by 50% starting at age 65 (or a non-subsidy year if I have one), probably over a few years to not hit NIIT. I don't want to buy back in a Roth or tIRA, because there I have no chance at all to recover the FTC.

Any other thoughts on this? Anyone else facing this same issue on losing FTCs?

[cathy63]

Yes, same problem. Our carryover is only $144 though, and the PTC we would lose by generating enough income to offset the foreign tax paid is over $10K.

I'm just going to keep carrying it forward until age 65 and try to use it up then.

[N02L84ER]

We are happily forfeiting the much smaller foreign tax credit and taking the much larger PTC. We are not carrying the FTC forward either.

[kaneohe]

Unlikely to help but in some cases consider taking a deduction for those foreign taxes paid where the credit is likely to expire before you can use them. I believe you can't take credit and deduction in the same yr so that means deferring the current yr credits. The deductions have less value than the credits but at least you get something before they expire. Only makes sense if you eventually will be able to use the credits.

[MichaelB]

RB, a while back you had a thread discussing managing MAGI for ACA purposes. One option considered taking a large gain in one year, losing the subsidy / premium credit that year, but improving your ability to keep your income below the thresholds for following years.

If you are still considering that as an option, that high income / high tax year might allow you to apply all your accrued FTC.

[RunningBum]

Quote:

Originally Posted by kaneohe Unlikely to help but in some cases consider taking a deduction for those foreign taxes paid where the credit is likely to expire before you can use them. I believe you can't take credit and deduction in the same yr so that means deferring the current yr credits. The deductions have less value than the credits but at least you get something before they expire. Only makes sense if you eventually will be able to use the credits.

That only helps if you itemize deductions, right? I don't do that anymore.

[RunningBum]

Quote:

Originally Posted by MichaelB RB, a while back you had a thread discussing managing MAGI for ACA purposes. One option considered taking a large gain in one year, losing the subsidy / premium credit that year, but improving your ability to keep your income below the thresholds for following years. If you are still considering that as an option, that high income / high tax year might allow you to apply all your accrued FTC.

That helps less than you'd think, because your allowed FTC is also based on a % of foreign income to total income. In 2017 I skipped the subsidy and was able to take all my FTC for 2017 and carry back ~$600 from 2018 before I hit the limit. So it helps, but doesn't come anywhere near using up years of accrued FTC. But if I have a year with a small subsidy, I'll take more income and part of it will be in sales of VTIAX, so that I catch up a little on taking the FTC and also reduce future foreign taxes.

[triangle]

I do not know what is the best course of action other than forget about it. Or slowly sell foreign stocks/fund and invest the proceeds into US securities, especially larger multinationals that have significant foreign exposure. Since if you have more FTC than you can use this year, unless you rebalance your portfolio the problem will not correct and the credit will never get used. I got concerned about this when a few of my investments started doing mergers/inversions to avoid US territorial tax (or lack thereof).

[RunningBum]

Quote:

Originally Posted by triangle I do not know what is the best course of action other than forget about it. Or slowly sell foreign stocks/fund and invest the proceeds into US securities, especially larger multinationals that have significant foreign exposure. Since if you have more FTC than you can use this year, unless you rebalance your portfolio the problem will not correct and the credit will never get used. I got concerned about this when a few of my investments started doing mergers/inversions to avoid US territorial tax (or lack thereof).

Once I start getting SS and my pension and stop worry about limiting income for the ACA, I'll start using the credit but probably won't catch up on carryovers unless I sell some of the foreign holdings, as you say. I'll probably do a little of that and not worry about the rest.