By Dr. Jim Dahle, WCI Founder

Many sophisticated investors know that there is a foreign tax credit that reduces your US federal income tax bill because you (or more likely your mutual funds in a taxable account) paid taxes to foreign governments. This is often a reason given to move international stock mutual funds into your taxable account before US stock mutual funds.

“You lose the foreign tax credit if you put international in your IRA.”

Well, that much is true, although its effect on tax efficiency these days is probably more than offset by the higher yield available with international stocks compared to US stocks. However, I think many people have, like me until very recently, a misunderstanding of how the foreign tax credit works. I assumed it worked like most state tax credits. If I pay tax to the state of California for California-sourced income, I get

Keep reading this article on The White Coat Investor.