Question:
I interned in England last year. I was paid and I also purchased shares of the company stock while I was there. I’m starting to gather my info for my taxes this year, and I was hoping you could shed some light on the foreign tax credit for me.
Answer:
If you have paid or accrued foreign taxes to a foreign country on foreign source income and you owe U.S. income tax on the same income, you may be able to take a tax credit for the foreign taxes you paid. Taking a tax credit will reduce your U.S. income tax liability. To choose the foreign tax credit, complete Form 1116 and attach it to your U.S. income tax return.
Although it is usually less advantageous to do so, you can also choose to take the amount you paid in foreign taxes as an itemized deduction. For more information on this subject, see IRS Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad. You can’t elect to take both the tax credit and claim the taxes you paid as an itemized deduction. However, you can change your choice from one year to another.
If you are a U.S. citizen working abroad, you may be able to minimize what you owe in U.S. income tax if you qualify for the foreign income exclusion. If you qualify, you may exclude up to $99,200 in foreign income from U.S. income tax liability in 2014. If you are married, your spouse is allowed an additional $99,200 exclusion. To qualify, you and your spouse must satisfy the following requirements:
- You must reside in a foreign country for an entire tax year or for at least 330 days during a 12-month period.
- Your salary must be paid by a company or agency in your country of residence or by a U.S. company operating in that country.
Also, only earned income—salaries, wages, and fringe benefits, plus allowances and expenses for housing—qualifies for the exclusion. Dividends, interest, capital gains, pension or retirement distributions, and alimony do not qualify. If you are a member of the U.S. military or other government service and are living abroad, your income is not considered foreign income. You’ll have to pay taxes as if you were a taxpayer living in the United States.
Even if you avoid U.S. income tax, you will likely pay some form of income tax to the country in which you reside and earn a salary. Should you fail to meet its residency requirements, or if you receive income above the allowable exclusion, you’ll probably end up paying both foreign and U.S. income tax. If you do pay foreign income tax, you can apply for a separate U.S. tax credit (using Form 1116) in the amount of foreign income tax you are required to pay.
You’ll also owe U.S. Social Security taxes if your country of residence has no treaty to coordinate its social service coverage with the United States. However, if such a treaty is in force, you’ll pay foreign social service taxes to your host nation and will not be required to pay U.S. Social Security taxes. In addition, you may be subject to estate and gift taxes if you transfer property, no matter where that property is located. If you maintain a house in the United States, you may owe state income tax and local property tax. For more information, consult a tax advisor or contact the IRS at (800) 829-3676 or www.irs.gov and request Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad.
Question
I have been told that I am too heavily invested in international funds. When is a good time to rebalance? And do I just do it all at once or gradually?
Answer:
Any international exposure was too much in 2013 given that domestic stocks outperformed most markets outside the U.S. The reason you buy companies in other markets is to lower volatility. Avoiding volatility is fine when markets fall as some will not fall as far as others.
However, in 2013, diversifying gave investors a lower return. Most of our client’s portfolios have some International exposure. The more aggressive clients have more exposure while less aggressive clients generally prefer more exposure to dividend-paying domestic stocks instead. We still recommend holding international stocks and since they have underperformed domestic stocks, you are more likely to be underweight your “normal” allocation. We generally recommend between 5% and 15% International exposure, again depending on client’s risk appetite.
As for when to rebalance, it should be determined on a case-by-case basis. It depends on if you are overweight in one stock or a mutual fund, and by how much you are overweight in a position. If you’re already invested in the market, there is little sense in pulling out just to dollar cost average back in. You will likely be better to just sell your international investments in favor of holdings that are more appropriate for your time horizon and risk tolerance. Depending on your potential capital gains, you may opt to spread the gain over two years by selling some holdings in 2014 and some in 2015.
Question:
I own Universal Corp and British American Tobacco. I was looking to trim my exposure to this industry. Should I sell one or trim both?
Answer:
Both of these companies are tobacco producers which have been under fire for years now. Currently, we own Lorillard Inc. (NYSE: LO), Altria Group Inc. (NYSE: MO) and Reynolds American, Inc. (NYSE: RAI).
Both of your picks are high quality companies that meet our investment criteria based on financial strength and safety, but Universal Corp. (NYSE: UVV) is growing its earnings and dividend at a slower rate than British American Tobacco (NYSE: BTI). British American Tobacco has a lower dividend yield at 2.77% vs. 3.61% for Universal Corp.
Revenues continue to grow for these companies, but they have slowed to the low single digits.. We believe that is probably in line with their long-term outlook, but they do provide attractive dividends.
Tobacco companies are not going to grow very fast. CVS announced this week they will stop selling tobacco products, which is the latest knock on tobacco.
At Henssler Financial we believe you should Live Ready, and that includes understanding the fundamentals of the stocks you own. If you have questions regarding your holdings, the experts at Henssler Financial will be glad to help. You may call us at 770-429-9166 or email at experts@henssler.com.
Disclosures
The following information is reprinted with permission from Forefield, a division of Broadridge Financial Solutions, Inc. This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
