Foreign tax

@hecht790 I don't think they're making any more enhancements to Gold and Bronze (Excel) but in Online you can make product suggestions right on each page so I'll add this, it's a great idea!

@hines202

My mistake. I will add it to the online version. It is especially applicable to the online version because of the new capability of 12 Assets in mode-2 which enables adding various foreign assets. Thank you, Bill.

I like your suggestion. I wonder what other additions to the Growth Taxation page might be helpful for assets? For instance, there is currently a column for interest taxed at federal level only (treasury bonds) and state only (municipal bonds), but not a way to enter zero coupon entities like ibonds or CDs or treasury bills that get all their interest at maturity. Then again, Pralana is not really set up for individual CD/ibond/treasury bill ladders, so I'm not sure how this addition would be used given there are no zero-coupon ETFs.

The Taxation table inputs are nontrivial and may confuse users. I suggest considering using the typical industry standard (such as 1099-DIV or stock reports) to minimize users’ calculations. Instead of using everything as % of growth use the following examples:

• Overall dividends (% of 1a from overall value in 1099-DIV)
• Qualified Dividends (% of 1b from 1a in 1099-DIV)
• Interest (1099-INT % of overall value)

There is no need to use Unrealized gain/loss on the Taxation table. The tool can calculate this from the RoR page.

Also, dividends and interests are more proportional to the overall value of the asset than the yearly growth. So, calculating taxes based on growth may not be accurate if growth fluctuates.

I'm wondering if just putting up a form that will allow folks to enter the values from their most recent taxable brokerage 1099 forms as a start would at least get them in the ballpark. Of course, that's just one year, whereas this is a long-range planning tool. Perhaps PRC could use that as a starting point to then calc based on changes to the asset allocation depicted in additional time periods.

@hines202

Once the tool supports the 1099 standard such as 1099-1a (overall dividends),1099-1b (Qualified dividends) and 1099-7 (Foreign tax), the user’s manual could provide some examples of 1099s and instructions on how to extract the information into the tool. 1099 is not providing RoR.

Feature Voting is now live on the site and included as one of the 8 initial features is: "Base interest and dividend income on % of balance" instead of % of Growth. When I make that change, I will very likely add support for Foreign Tax Paid and modify the inputs to refer in some way to 1099-INT and -DIV as Gabby suggests.

Assuming an account balance of $100K and 1% is Foreign Tax paid (10999-INT box 6 or 1099-DIV box 7), the amount would be $1000. Would I need to provide separate Foreign Tax Paid fields for interest and divs? I think so, as they are taxed differently.

Apparently credit for Foreign Tax paid can be taken as a tax credit on Schedule 3 line 1 or Schedule A. I would probably assume Schedule 3. Form 1116 is fairly complicated. Perhaps I can find some simplification.

With regard to CDs and other fixed income assets, one of the Feature Voting options is "Add Fixed Income Assets feature". This would be treated somewhat like personal loans in that you would have an initial cash outlay, receive a stream of income (which could perhaps be deferred until maturity) and receive a return of principal at the end. The asset may appreciate over time and its value would be included in net worth. These assets would not be held in any specific Pralana account. The requirements need to be fleshed out and, as with everything, the devil is in the details.

Fixed income asset feature:

Posted by: @cstone

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With regard to CDs and other fixed income assets, one of the Feature Voting options is "Add Fixed Income Assets feature". This would be treated somewhat like personal loans in that you would have an initial cash outlay, receive a stream of income (which could perhaps be deferred until maturity) and receive a return of principal at the end. The asset may appreciate over time and its value would be included in net worth. These assets would not be held in any specific Pralana account. The requirements need to be fleshed out and, as with everything, the devil is in the details.

The idea of an initial outlay, with a stream of income, including an option to defer until maturity, seems like it would work. It is assumed the asset wouldn't be sold before maturity. CDs held at banks usually pay the compounded interest at maturity, while CDs held at brokerages often pay out their interest along the way similar to a bond. Ibonds pay at maturity (though they are free of state tax). TIPs pays out biyearly coupons (like nominal bonds), but the principal is inflation-adjusted (and that adjustment gets taxed as ordinary income each year although you only received it back at maturity). Nominal bonds are the same but without an inflation adjustment. So the principal (adjusted to inflation or not) and coupon payments along the way or at maturity covers all the cases I can think of.

With regard to a fixed income asset not being held in any specific pralana account, two issues come to mind:

1) In real-life they'd be held in Taxable, Tax-sheltered, or Roth, so would need a variety of taxation options beyond just whether interest was paid at maturity or along the way.

2) If held at a brokerage IRA, bonds and CDs can usually be converted to Roths in-kind (without liquidating), while if held elsewhere or as a 401k usually can't. So user would need to indicate if any fixed income asset are to be included in Roth conversion analysis as part of the IRA sum or not.

@jkandell

Thank you, Jonathon, this is super helpful. Thinking further about how to implement this:

Maybe a drop down which would be used to select 'asset type' (CD, Ibond, TIP, Bond, etc) and then custom code based on asset type to handle the cash flow calculation. This assumes a common manageable number of input fields to cover all asset types:

• asset type
• source account (like for annuity purchases or scheduled withdrawals)
• purchase amount
• purchase start year
• purchase end year (to support bond ladders and other recurring purchases)
• yield/interest rate
• sale date/duration
• maturity value (?)
• percent taxable

Otherwise we have different forms for different asset types, like we do for the various property loans.

I agree 100% that the taxation has to be handled properly. Would it suffice to have a % income taxable field (0% to 100%) to handle the income taxation? If taxable, the asset type would determine whether income/appreciation is taxable by fed only, state only or both and whether taxed as interest (ordinary income) or capital gain.

Given that the value of the asset adds to net worth, is the benefit of virtually holding it in one account versus another versus just having it as an asset (like a car or rental property or personal loan) worth the added complexity. Consider a CD bought from an internet bank:

• The funds to purchase it have to come from somewhere (easy: assume 'source account' options like the scheduled withdrawals or annuity purchases).
• Where do the income and sale proceeds go? Always to cash...or back to the source account?
• If virtually held in an account, could/would withdrawals from that account force a premature (partial) liquidation of the asset? (seems too complicated)
• If virtually held in an IRA, would it contribute to the RMD calculation? (some qualified annuities do) and would the income received offset the RMD? (seems too complicated)
• Roth conversion in-kind: what if the Roth conversion amount is half of the CD value? What if there are 15 of these assets in the IRA...how could the R/C algorithm determine which are in the conversion and which are left behind? I think this level of complexity is a show stopper.

I am thinking we make it more like rental property or personal loan:

• Funds withdrawn from some account to buy it
• income goes to cash
• sale proceeds go to cash
• value contributes to net worth

Foreign Tax Credit

Posted by: @cstone

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Feature Voting is now live on the site and included as one of the 8 initial features is: "Base interest and dividend income on % of balance" instead of % of Growth. When I make that change, I will very likely add support for Foreign Tax Paid and modify the inputs to refer in some way to 1099-INT and -DIV as Gabby suggests.

Assuming an account balance of $100K and 1% is Foreign Tax paid (10999-INT box 6 or 1099-DIV box 7), the amount would be $1000. Would I need to provide separate Foreign Tax Paid fields for interest and divs? I think so, as they are taxed differently.

Apparently credit for Foreign Tax paid can be taken as a tax credit on Schedule 3 line 1 or Schedule A. I would probably assume Schedule 3. Form 1116 is fairly complicated. Perhaps I can find some simplification.

@jkandell

You wrote: “It is very rare for foreign dividends to be qualified.” In 2024 my 5 foreign investments have an average of 71% qualified dividends.

You wrote: “but I don't think you need to separate fields for interest and div.” Interest and unqualified div are taxed the same (regularly), and LTCG and qualified div taxed the same (0, 15% or 20%). So, 2 columns are sufficient, no extra columns.

Regarding the importance of foreign credits, kind of dividends and Asset Location. They may affect taxes depending on the marginal rate. Sometimes the Asset Location is not obvious, especially with foreign equities. Trying various options with the PRC tool can help. For example, the improved Asset Location Scenario in my recent modeling has 3.5% increase in my overall saving over 25 years compared to my current Asset Location, which has issues with international equity locations, and requires paying capital gain taxes to change. People in their early savings can improve their Asset Location by using a few common tax efficiency guides and trying them on PRC.

But the vote is not about foreign dividends or credit but mainly to correct the tax calculation “% of balance" instead of “% of Growth”. PRC is a good tax prediction tool and should be accurate.

BTW, is there a formal voting location? Where?

Respectfully, I have an ex-US total market fund in my taxable account with a fairly high balance, and the tax credit is a rounding error to my plan. If I had it to do over, I'd have used only US index funds in taxable given the smaller dividend payout and higher % qualified. Not sure the complexity is worth it to code into Pralana? This article was too late for me, but maybe it can help someone else: https://www.physicianonfire.com/international-stock/

@hecht790 To my knowledge, for a dividend to be considered "qualified," it must be paid by a U.S. corporation or a "qualified foreign corporation," and the shareholder must meet certain holding period requirements. A foreign corporation can only be considered a "qualified foreign corporation" if it meets one of the following criteria:

• It is incorporated in a U.S. possession.
• It is eligible for the benefits of a comprehensive income tax treaty with the U.S. that includes an exchange of information program.
• Its stock is readily tradable on an established securities market in the U.S.

@jkandell

Qualified foreign equities are more common than rare. I trust Vanguard and Fidelity 1099-DIV to determine the % of qualified ETFs. Here is a link to Avantis Qualify per ordinary dividends.

https://www.avantisinvestors.com/avantis-resources/tax-center/qualified-dividend-income/

All Avantis International ETFs (except EM) are above 60% qualified. I believe that most investment firms recommend adding international (except Pizza Man).