*Official* BBCWatcher club

celtosaxon

Senior Member
Joined
Oct 4, 2018
Messages
1,691
Reaction score
764
BBC, I’ve been trying to learn all the intricacies of the foreign tax credit in the US tax code. One particular topic I’ve been diving into this weekend is the “limit” on the foreign tax credit.

Here is what I understand so far.

The limit is the US tax owed that is attributable to foreign income. To calculate it, take your US tax on 1040 times the % of foreign income out of your total income. The limit seems to serve several purposes. It prevents the FTC from becoming a refundable credit (hence the carryover) and it also ensures that you use up the credit when the opportunity arises - it seems the FTC takes priority over other credits, so even if you don’t use it, it gets absorbed... just as if you did use it. If your US tax attributed to foreign income is more than the foreign tax paid, this becomes an excess carryover, reducing any FTC carryover(s) in the process. This is because when your US taxes exceed your foreign taxes, conceptually you are expected to pay the difference (at least within the FTC framework), even if there may be other means to reduce or eliminate them.

Does this make sense so far? I have not found much good information online or from the IRS that explains it in simple terms. The logic and intentions behind it seem lost in the complex myriad of mechanics and inner workings.
 

BBCWatcher

Arch-Supremacy Member
Joined
Jun 15, 2010
Messages
20,079
Reaction score
2,989
It looks like you’ve explained the U.S. tax code’s Foreign Tax Credit pretty well. Another important aspect is the division of income into broad categories, so there are really a few “lanes” of FTCs. Here are a few other points to mention:

1. Only foreign income taxes legally owed, sans penalties and interest, are creditable. GST, VAT, stamp duties, compulsory social insurance taxes, wealth, gift, duties, property, and many other taxes are disallowed here. (I’ve heard of some U.S. persons complaining about the Net Investment Income Tax in reverse, that some foreign tax codes are disallowing NIIT credits, treating them as compulsory medical insurance premiums since the revenue is advertised as dedicated to Medicare. And that they wish the NIIT were just folded into the ordinary income tax rates.)

2. I believe there’s an alternative deduction path, but I’ve never taken that path.

3. I’m not entirely sure whether it’s obligatory to spend down accumulated FTCs, or at least not always. For example, there’s no obligation I’m aware of to carry an excess FTC back to the prior tax year and file an amended return, which is allowed. However, I cannot think of any good reason why you’d want to delay taking FTCs since you don’t earn interest on them. [I think the FEIE is different, though. I believe that if you take the FEIE it must be across all excludable income, not just the part(s) you’d like to exclude.]

4. There are limitations on bouncing between taking and not taking the Foreign Earned Income Exclusion, even if you might prefer taking only FTCs in a particular year then try to flip back to taking the FEIE in a subsequent year.

5. You may get a better result applying a tax treaty provision if one exists, but as far as I know you’re not required to.

6. Some of the tax preparation software providers don’t handle IRS Form 1116 (FTCs) at all, and the ones that do don’t necessarily handle it particularly well.

7. You’re allowed to apply an excess FTC to the prior tax year and/or to the next 10 tax years. (It used to be 2 and 5.)
 
Last edited:

celtosaxon

Senior Member
Joined
Oct 4, 2018
Messages
1,691
Reaction score
764
For #3 it seems like you must take all prior carryovers (whether favorable or unfavorable) into consideration, because 1116 includes that and it instructs you to attach your computations. For that attachment, I’ve not found any template or sample online, and the IRS instructions are not totally clear on what details are needed.

After reading and re-reading it several times, it looks like those who don’t have any spouse sharing complications, the attachment simply needs 4 columns: tax year, limit, creditable foreign tax paid and the resulting excess limit or excess FTC.

It is pretty clear that the creditable foreign tax paid has to be adjusted for the portion of foreign income that was excluded on form 2555. I’m assuming any other credits/deductions taken on 1040 are already considered in the limit.
 

BBCWatcher

Arch-Supremacy Member
Joined
Jun 15, 2010
Messages
20,079
Reaction score
2,989
Is hospital income policy a must have? Or good to have?
Neither, really. You should have paid medical leave and emergency reserve funds to handle such an event, and Disability Income Insurance if the inability to work is prolonged or permanent. It's that much easier to have more emergency reserve funds and better DII coverage when you're not spending precious premium dollars on questionable (or worse) insurance products.

Remember what genuine insurance needs are: to help mitigate the impact of true calamities and catastrophes that you cannot reasonably handle on your own, and when a monetary payout would help. "Hospital income" policies do not fit that profile.

However, if/when you buy even a public restructured hospital Integrated Shield plan with rider, you'll often see there's a daily cash "reward" if you stay in a lower hospital ward than the policy is designed to handle. You shouldn't buy an Integrated Shield plan and rider that's above what you actually need (unless you've at least covered all your genuine needs first), but if you happen to have that option "by accident" and want to take advantage of it during a particular hospital stay, feel free.
 

bullshitregister

Junior Member
Joined
Sep 22, 2002
Messages
85
Reaction score
2
Hi BBC,

I have a question on buying foreign stocks that are listed on multiple exchanges.

ie. Ericsson

Using something like IB, it seems like the company is listed on Nasdaq, Mexi, IBIS2 and SFB and likely also having multiple classes of shares (ADR, A and B).

In a case like this, how would you determine the best one to buy? Guessing they are all ultimately the same company, but are there differences in withholding taxes, dividend policies etc?

Thanks in advance.
 

BBCWatcher

Arch-Supremacy Member
Joined
Jun 15, 2010
Messages
20,079
Reaction score
2,989
Most people shouldn't buy or trade individual stocks.

That said, if you're going to buy individual stocks, you need to do your research, and that includes picking the best trading vehicle for your particular situation. Usually, at least for a major/significant company such as Ericsson, the ADRs will be quite attractive or at least no less attractive. If you're a non-U.S. person, there are no U.S. taxes associated with ADRs. ADRs listed on the two major U.S. exchanges typically have good or excellent trading volumes, narrow bid-ask spreads, and low or zero broker commissions. But that's only a "rule of thumb," not a universal truth. Go investigate.
 

slothbal

Member
Joined
Oct 7, 2006
Messages
242
Reaction score
0
Hi BBC,

First and foremost would liked to thank your generous sharing.

I have a few question and hope you could share your views.

Now that we are experiencing a slow down. Do you foresee any major recession in the way? No one knows for sure when but what is your guess?

Also, what are some safe investments at this point of time that we could look at? Stocks are not doing well. Property might crash. What are other alternatives? With Ammo of 500k cash and 1 hdb (first purchase) worth 500k fully paid. 😅 mid 30s

Thank you in advance.
 
Last edited:

highsulphur

Great Supremacy Member
Joined
Aug 16, 2011
Messages
65,297
Reaction score
30,957
Hi BBC,

First and foremost would liked to thank your generous sharing.

I have a few question and hope you could share your views.

Now that we are experiencing a slow down. Do you foresee any major recession in the way? No one knows for sure when but what is your guess?

Also, what are some safe investments at this point of time that we could look at? Stocks are not doing well. Property might crash. What are other alternatives? With Ammo of 500k cash and 1 hdb worth 500k fully paid. 😅

Thank you in advance.

Stocks are doing amazingly well. Just not in singapore :s22:
 

slothbal

Member
Joined
Oct 7, 2006
Messages
242
Reaction score
0
Stocks are doing amazingly well. Just not in singapore :s22:

Hi there. Thank you so much for your input. Have bad experience with stocks but maybe it is due to my inexperience. Got burnt. But with economic not fueling up, and stock doing good, would there be a potential pitfall? Do know of some that hang on to stocks though alr depreciated in value but still drawing dividends.
 

Okenba

Supremacy Member
Joined
Nov 14, 2012
Messages
5,324
Reaction score
1,002
Topped up your CPF to FRS yet? Your wife?
Those are typically safe returns.
Sorted out your insurance? Especially if you have dependents?

Buy a global index, automate as best you can, check back in 20yrs. =D
 

slothbal

Member
Joined
Oct 7, 2006
Messages
242
Reaction score
0
Topped up your CPF to FRS yet? Your wife?
Those are typically safe returns.
Sorted out your insurance? Especially if you have dependents?

Buy a global index, automate as best you can, check back in 20yrs. =D

Hi there, I did not top up my FRS as I am not sure if I would make another property purchase in future as an investment. I did not load too much insurance on my kids. Only bought 200k on my life and my spouse. And also covered the kids life so they will not need to pay high premiums then.
 

BBCWatcher

Arch-Supremacy Member
Joined
Jun 15, 2010
Messages
20,079
Reaction score
2,989
Now that we are experiencing a slow down. Do you foresee any major recession in the way? No one knows for sure when but what is your guess?
According to the available data, the manufacturing sector in Singapore is already in recession, and the rest of the economy is roughly moving sideways. The government is forecasting GDP growth of 0.5% to 1.0% for 2020, less on a per capita basis (total population generally increases slightly due to net inward migration). That seems like a reasonable forecast to me.

As far as "black swan" events, if the Chinese and Hong Kong governments don't honor the wishes of the people of Hong Kong, then Singapore will likely be the primary, one-time beneficiary of turmoil there. Let's all hope that doesn't happen.

Also, what are some safe investments at this point of time that we could look at? Stocks are not doing well.

Stocks are doing amazingly well. Just not in singapore :s22:
Actually, the Straits Times Index (STI) stocks have performed fairly well. State Street Global Advisors has very recently published the standard performance data through year end 2019 for their STI stock fund, ES3, and here it is (annualized, dividends reinvested, net of estimated costs):

1 Year: 9.00%
3 Year: 7.29%
5 Year: 2.53%
10 Year: 4.07%
Inception (April 11, 2002): 6.93%

That's pretty decent, actually. I think long-term Singapore dollar-oriented investors should be quite satisfied with that record so far.

slothbal said:
Property might crash. What are other alternatives? With Ammo of 500k cash and 1 hdb (first purchase) worth 500k fully paid. �� mid 30s
Assuming your insurance necessities are covered and you keep some emergency reserve, why not just dollar cost average into the "standard" 3 fund formula? What's wrong with that?

I would not have rushed to pay off your HDB unit (presumably financed with very cheap dollars) as you evidently did, but what's past is past.

Insurance necessities generally mean:

1. Term life insurance if you have one or more dependents, although maybe you can self-insure now;

2. Disability Income Insurance (DII);

3. A basic Integrated Shield plan (e.g. Great Eastern's Supreme Health B Plus assuming you're a citizen; extra cost/higher level plans are insurance luxuries);

4. Travel medical insurance if you venture outside Singapore.

The "three fund formula" typically means:

A. MBH for the bond leg;

B. ES3 or G3B for the local stocks leg;

C. IWDA or VWRA for the global stocks leg.

These funds are not appropriate for U.S. persons, and this list is based on having the legal ability and expectation to retire in Singapore. I personally don't feel comfortable having more than 20% of your portfolio in ES3 or G3B until you get much closer to retirement age, but there's a friendly disagreement on that point.

Have bad experience with stocks but maybe it is due to my inexperience. Got burnt.
What happened? What did you do?

But with economic not fueling up, and stock doing good, would there be a potential pitfall? Do know of some that hang on to stocks though alr depreciated in value but still drawing dividends.
Sure, stock prices could go down. Since you're in your 30s, retiring ~30 years from now, and dollar cost averaging into age appropriate, prudent investments, you would be/should be very happy if stock prices fall while you're buying. That means you're getting a better deal.

Do you buy more apples at the supermarket when the price of apples goes up, or do you buy a few more apples when they're on sale? Stocks are no different, and dollar cost averaging means you buy more shares when the price is lower and fewer shares when the price is higher.

Topped up your CPF to FRS yet? Your wife?
Those are typically safe returns.
Sorted out your insurance? Especially if you have dependents?
Buy a global index, automate as best you can, check back in 20yrs. =D

Hi there, I did not top up my FRS as I am not sure if I would make another property purchase in future as an investment.
Oy vey. ;)

Currently your approximate net worth is roughly S$1 million, and half that net worth is already in directly held Singapore real estate. And you just got through fretting above that real estate could crash. (Yes, it could!) So do you want to raise your investment exposure to Singapore real estate from ~50% to...well, what do you feel comfortable with?

I think Okenba might have a good idea here for the initial bond/bond-like portion. Assuming you maintain adequate or better liquidity, it's tough to beat 4% Special Account interest and with tax relief on up to $7,000 top ups (one for yourself, and another $7,000 total when topping up one or more qualified family members' SAs/RAs). MBH, the bond fund I listed above, almost certainly won't beat 4% SA. There are also MediSave top ups for tax relief if you can squeeze them in, and I like those better, actually, when you're earlier in your career, as you are.

I did not load too much insurance on my kids. Only bought 200k on my life and my spouse. And also covered the kids life so they will not need to pay high premiums then.
This last bit doesn't make sense to me. Children don't have dependents, and term life insurance at circa age 30 when they start families and have dependents is not at all expensive. And nobody is paying any premiums for insurance they don't need for the ~30 years before they need it, and that means their parents (and future benefactors) -- you -- are that much wealthier and can spoil them and their children (your future grandchildren) even more.
 
Last edited:

Okenba

Supremacy Member
Joined
Nov 14, 2012
Messages
5,324
Reaction score
1,002
Hi there, I did not top up my FRS as I am not sure if I would make another property purchase in future as an investment. I did not load too much insurance on my kids. Only bought 200k on my life and my spouse. And also covered the kids life so they will not need to pay high premiums then.

Kids don't have dependents and generally don't need insurance. Do your own due diligence because some say that locking in their insurability is worthwhile.

You may wish to think more about your own insurance. Especially if your spouse is not working. Even if your spouse is working, your household loses half their income should you pass on. If you have young kids, your spouse would need to support them until they are old enough to earn for themselves. Would your insurance be of sufficient help for your spouse to do so? (Having said that, your assets also serve as a form of 'insurance', so with 500k and a fully paid mortgage, you may actually be okay. *shrug*)
 

BBCWatcher

Arch-Supremacy Member
Joined
Jun 15, 2010
Messages
20,079
Reaction score
2,989
Chinese authorities have effectively shut down the city of Wuhan, the city of about 11 million people where a novel strain of Coronavirus was first detected in humans late last year. This strain's closest relative is the SARS virus which also causes flu-like symptoms, sometimes quite severe. This new strain is not well understood yet, but it is human to human transmissible and, like SARS, can sometimes be fatal.

I'm fairly optimistic that public health authorities in China and elsewhere will handle this outbreak better than their predecessors (mis)handled the 2003 SARS epidemic and that they'll have the support they need. One hard lesson learned from SARS is that everybody needs to be sharing accurate information as soon as they have it, and China seems to be doing that. For example, Chinese public health authorities were able to get this strain isolated and share its genome quickly, and now public health organizations can detect this strain from patient samples. It took years to get that far with HIV, and all this diagnostic progress happened in days, really.

The vast majority of news reports don't have any macroeconomic or financial market impact except perhaps to high frequency traders, and usually not even then. This one is a possible exception since the SARS epidemic did have a medium-term impact on the real economy, especially regionally. We'll see, but I think China and the rest of the world will be OK.
 

revhappy

Arch-Supremacy Member
Joined
Mar 19, 2012
Messages
11,432
Reaction score
2,048
Hi BBCW,

I am trying to rationalize by number of bank accounts/credit cards I have. Currently I have the following.

DBS bank A/C +CC
SCB bank A/C +CC
HSBC bank A/C +CC
ICBC bank A/C +CC
CIMB bank A/C +CC

CIMB used to be good when their CC had high cash back and also low currency conversion fees. But those have changed. Now the only good thing about CIMB seems to be zero incoming foreign ccy TT. But I believe ICBC also has zero incoming foreign ccy TT

http://v.icbc.com.cn/userfiles/Reso...ownload/2016/Fee_and_charges_wef_May_2016.pdf

So, I am considering closing CIMB credit cards and the bank accounts. Do you see any good reason to keep them?

Thanks in advance!
 

arcaninx

Senior Member
Joined
Nov 21, 2004
Messages
1,667
Reaction score
0
Hi BBCW, could u advise which stock broker is the cheapest for buying Singapore stocks using SRS funds?

Thanks
 

BBCWatcher

Arch-Supremacy Member
Joined
Jun 15, 2010
Messages
20,079
Reaction score
2,989
Hi BBCW, could u advise which stock broker is the cheapest for buying Singapore stocks using SRS funds?
There are some other threads on that. FSMOne appears to be generally pretty competitive for these purposes, at the moment.
 
Important Forum Advisory Note
This forum is moderated by volunteer moderators who will react only to members' feedback on posts. Moderators are not employees or representatives of HWZ. Forum members and moderators are responsible for their own posts.

Please refer to our Community Guidelines and Standards, Terms of Service and Member T&Cs for more information.
Top