Question:
A few of the companies you’ve mentioned over the years, such as Total and Teva, show that a portion of my dividend each month/quarter has a deduction for “foreign tax paid.” Does it make much more work for the CPA when he is doing the tax returns for the average little guy like me? If the company is listed as paying a 5% dividend, but then they take out some money for the foreign tax, is my actual net dividend income the 5% or less? I guess the same question holds true for structured partnerships, such as Cedar Fair. Does it make sense to not own these stocks (find something else similar) to simplify and make year-end accounting/tax time less involved?
Answer:
It is not uncommon for C.P.A.s to encounter Form 1099s that show foreign taxes paid. Unless you own a significant amount of foreign stocks, the taxes paid are usually a small amount. From a reporting standpoint, it is not that complicated. If the foreign taxes paid are less than $300 for single filers, or $600 for joint filers, all a taxpayer has to do is take the amount paid as a foreign tax credit on line 47 of Form 1040. This is a dollar for dollar credit that reduces your tax liability. If you paid more than the allowable credit, you then complete Form 1116 Foreign Tax Credit. When you own these stocks in a brokerage account, you are able to recoup some if not all of the taxes paid though the credit on your tax return; therefore, this is not a concern from an investment standpoint.
Master Limited Partnerships (MLPs), on the other hand, can greatly complicate a tax situation. As investment managers, we do not despise them; however, they are often concentrated in industries, such as energy, that we prefer to invest directly in common stocks or exchange-traded funds. MLPs are becoming more common as they are often found as holdings in commodity based exchange-traded funds.
When you own an MLP, you own a portion of a partnership. Come tax season, you will receive a K-1, which is a tax document that reports your share of the partnership’s incomes and deductions. Investors should pay close attention to the K-1 because the various items of income may flow to different forms on your personal tax return. This can make your tax return fairly complex. It doesn’t take a big investment to complicate your taxes. If you are considering only a $500 investment in Cedar Fair, L.P. (NYSE: FUN), you may want to consider how much it will raise your tax preparation fees.
If you own an MLP, and you do not have your K-1, you may want to try www.taxpackagesupport.com as you may be able to get access to companies’ filed K-1 reports.
At Henssler Financial, we believe you should Live Ready, which includes understanding how your investments affect your taxes. If you have questions regarding your family’s tax situation, the experts at Henssler Financial will be glad to help. You may call us at 770-429-9166 or email at experts@henssler.com.