Foreign taxes paid on IRA account tx

[Penelope]

Can these taxes be taken as a credit on page 2 of the 1040?

Two Canadian companies merged and the stockholders received proceeds. From these proceeds, Canadian capital gains taxes were withheld. Client read on company website that the taxes may be taken as a foreign tax credit on his 1040 tax return. Do you agree?

Thanks.

[Lion]

Can't have it both ways

He's not paying taxes on the gain so he can't deduct foreign taxes paid within his IRA.

[Penelope]

Thanks

I appreciate the speedy reply. Your answer makes sense. The whole transaction is a bit baffling to me -- I don't understand why he "sold" at a loss and had to pay Canadian taxes, but there you go.

[OtisMozzetti]

He's not paying taxes on the gain so he can't deduct foreign taxes paid within his IRA.

If the IRA is a traditional IRA, then it is a "tax-deferred" investment rather than a "not paying taxes on the gain" investment. The reasoning for the lack of a foreign tax credit, or of a deduction for foreign taxes paid, may not get very far, but the conclusion is of course a correct conclusion.

[Lion]

That's what I meant

That's what I meant even if it's not what I said! In an IRA, you don't pay taxes, or take deductions for things going on within the IRA. It's tax deferred. When you take a distribution from an IRA, you pay taxes on the distribution as ordinary income if it's a traditional IRA. I was suggesting a way to explain to a client why he can't take a deduction for taxes paid within an IRA, since most clients do understand that they don't pay taxes on earnings, appreciation, etc., within their IRAs. Of course, the broker is more the problem than the client in this case.

[OtisMozzetti]

a similar problem concerns TIPS

...When you take a distribution from an IRA, you pay taxes on the distribution as ordinary income if it's a traditional IRA. ...

This reminds me of another example that the tax breaks which apply within a traditional IRA count for nothing at all when there are distributions made from the IRA: I have TIPS, Treasury Inflation-Protected Securities, in a traditional IRA. It does me no good at all that the interest is a direct obligation of the U.S. Treasury; the state will tax those distributions the same as any other income.

Even if TIPS are held within a Roth IRA, the interest earned is no more exempt from state income tax, if withdrawn in a qualified distribution, than it would've been anyhow if the earnings had come from a taxable investment.

[Davc]

I take it you're not an OR resident:

https://secure.dor.state.or.us/piti/index.cfm?action=topic&id=0108

[OtisMozzetti]

Thank You!

I take it you're not an OR resident:

https://secure.dor.state.or.us/piti/...=topic&id=0108

Thank you very much, Davc, for a very enlightening fact about the U.S. government interest which gave rise "in all prior years (?)" to an IRA distribution that is in line for Oregon state income tax.

Many of us realize that there is a general theory of investment asset placement which says that highly taxed investments should be placed inside tax-advantaged accounts while tax-favored investments should be placed in one's taxable account.

I don't know that the computation prescribed in the Oregon worksheet is going to be all that simple, but I suppose I am glad that Oregon has perhaps led the way in recognizing the issue.

EA in California