# Foreign Account Management Fees - Deductible?



## skyfx (Sep 16, 2014)

Hi all,

I hold a mutual fund in Germany that charges an annual account management fee. My understanding is that these fees (at least domestically in the US) are only deductible "for the amount that exceeds 2% of your adjusted gross income (AGI) from line 38 of your Form 1040".

When filing my US income taxes, I file my earnings from the aforementioned mutual fund as a capital gain using form 1099-div / form 1116. I noticed that form 1099-div has an "investment expenses" line, and likewise, form 1116 has a section for "Expenses Definitely Related to this Income". Are any of you aware if I can include these foreign account management fees on one of those forms?

Appreciate any insights you could share 

-skyfx


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## BBCWatcher (Dec 28, 2012)

Perhaps I'm wrong, but I've always kept things simple and accounted for investment costs only when capital gains are realized.

For example, let's suppose you buy some investment for US$10. You hold it for 10 years, then you sell it for US$14. Along the way you paid a total of US$2 in trading costs, account fees (pro-rated to that holding for that period), etc. Your net gain is thus US$2, and that's your taxable capital gain. Of course I keep all reasonable documentary evidence to support that calculation.

Obviously this is a little different if you're dealing with PFICs. I don't.

Is that approach wrong? I don't think so, but others should feel free to chime in here.


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## Bevdeforges (Nov 16, 2007)

Take a look at publication 550. It should explain what is and isn't deductible.

Don't have time to skim it myself, but one possibility is that you can report dividends and interest net of expenses related to realizing them. Check pub 550 on this, but I know you can do this going the other way (i.e. that's how you report that income here on French tax declarations - i.e. net of direct expenses and/or taxes).
Cheers,
Bev


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## BBCWatcher (Dec 28, 2012)

Isn't a German mutual fund a PFIC from the IRS's point of view? If that's correct, you'd probably just make QEF elections annually net of IRS Publication 550-allowed expenses.

I'm confused by the reference to forms 1099-DIV and 1116, by the way.


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## Bevdeforges (Nov 16, 2007)

On some tax preparation softwares you have to swami up a sort of dummy 1099 form to report dividends or interest income. Perhaps the OP is doing something like this?

Or, if you're actually receiving a 1099-div then perhaps the fund is actually handled by a US entity of some sort (i.e. like a military bank or something)? 
Cheers,
Bev


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## skyfx (Sep 16, 2014)

Thanks for the responses, everyone. Allow me to slightly clarify my first post. When I said "a mutual fund in Germany" I meant I have an account with a German investment company where I have a mutual fund producing capital gains. Apologies if that was misleading. Since it is a German company, I am not actually receiving a US form 1099-DIV from them, but they do provide a German equivalent of sorts.

I use TaxACT.com to file my US taxes. In their "Federal Q&A"/"Dividend Income" section, I entered the details of my foreign capital gains. As per my original post, this is where I have the option to fill in "investment expenses". The information I provide the software in that section can then be used to pre-populate form 1116. The reason I am filing the latter is to claim a foreign tax credit (for the taxes I have already paid on my capital gains). As part of filling out form 1116, I then have the option to fill in "Expenses Definitely Related to this Income", which I alluded to in my original post.

@Bevdeforges: Thanks for the pointer to Pub 550, I had not previously seen it. I searched through it and unfortunately was not able to find an answer to my specific question related to expenses on a foreign investment. This may suggest that these are treated in the same way as expenses on a domestic investment, but even so, I would be curious to know whether I should declare it as part of my form 1099-div or form 1116.

@BBCWatcher: My understanding is that to be defined as a PFIC, the corporation has to pass either the income test (75+% of the foreign corporation's gross income is passive income) or asset test (50+% of the foreign corporation's average assets produce, or could produce passive income, or are assets (such as cash and bare land) that produce no income) (I am paraphrasing from Wikipedia here). I am not sure that my German investment company passes either of these tests, and unfortunately, I'm not sure how to find out.


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## Bevdeforges (Nov 16, 2007)

skyfx said:


> @Bevdeforges: Thanks for the pointer to Pub 550, I had not previously seen it. I searched through it and unfortunately was not able to find an answer to my specific question related to expenses on a foreign investment. This may suggest that these are treated in the same way as expenses on a domestic investment, but even so, I would be curious to know whether I should declare it as part of my form 1099-div or form 1116.


Basically, you have to apply the rules for US investments to your foreign investment (just without the 1099 form). Just be careful because a 1099 can vary a bit based on the suffix. The 1099-div is for reporting dividends. If you're dealing with capital gains, all the same rules apply but I don't know if the 1099 form is exactly the same. 

You should, however, be able to net investment-related fees against the earnings on those investments. Heck, try it and see how it works out. (That's the fun/joy of those tax preparation programs - you can try things out and see how/if they affect the ultimate amount of taxes due.)
Cheers,
Bev


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## BBCWatcher (Dec 28, 2012)

From you're description you're almost certainly dealing with a PFIC. A mutual fund is inherently a passive income vehicle, so I don't think it'd have any problem qualifying as a PFIC. In fact that's the presumption with foreign mutual funds.


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