Dividends and Tax Withheld

[flight]

Mark,

Two questions on recording Dividends in FM.

First, if I have an ADR that pays a dividend while also withholds tax, how should I record it? The first entry is the gross dividend amount. The second is the withholding for tax. The dividend gets recorded under the stock, but if I record the withholding under the stock as well (and not re-invested), I think it messes up the IRR calculations?

Second, if I am short a stock and my brokerage charges the dividend. Typically when I download the transactions it comes through as a negative dividend under the stock. And since it is not reinvested, I think it is messing up the IRR calcs here too? It just gets debited from my cash account.

thanks

[Mark]

Hi flight,

If you record the withholding tax as a negative distribution, it will lower you ROI. If you don't want to account for the withholding, and your shares are reduced, record it as a sell instead.

Any distributions will affect the ROI. In this case it sounds correct, since you are having to pay for the dividend. Recording it as a negative distributed distribution where the money comes out of your cash sounds like it is accurately reflecting what happened.

[flight]

Thanks Mark,

So for example, if I receive a dividend of $100 for a Sony ADR, and there is $40 witholding tax, I should record the $100 dividend under the Sony security, and then -$40 dividend (re-invested) in the cash account?

I guess alternatively I could also just record the net amount of $60.

And then if I am short IBM stock, and I am deducted $100 for a dividend, I should not book the -$100 dividend under the IBM security, but rather the cash account (re-invested)?

I just want to make sure my ROI/IRR calculations are accurate, and this crossed my mind because if I don't check off re-investment, it will treat as a withdrawal.

[Mark]

Hi Flight,

I would record the $100 reinvested dividend in Sony.

If you want to not be penalized for the tax being withheld: Record a sell for the number of shares that were redeemed to pay the tax. The proceeds will be deposited into your cash, and then you would have to sell the cash too. This doesn't penalize either the investment or your cash.

If you want to account for the tax as part of the investment's ROI, record it as a negative reinvested distribution. No money will flow into cash, and the ROI of your investment will factor in this tax.

For the short situation, record a negative dividend in the IBM stock. This will generate a sell of your default cash account to pay for this dividend. This will put the performance penalty with that stock, and not your cash.

[flight]

Thanks Mark. Sounds like I was over thinking it, and it is correct as I have recorded -- under the stock.

[flight]

Mark,

Just a follow up question on how to record this in FM....

I do NOT want to reduce my ROI from the tax withholding related to the foreign ADR/security (I will eventually get a tax credit when I do my tax return).

But there are no shares being sold either. So, would it be a cash withdrawal?

[flight]

Actually Mark, I just thinking about this a little further. I am really not sure if the witholding tax should or shouldn't impact TWR performance.

I read an article saying how international ETFs, for instance, get negatively impacted (again, moderately) by the withholding taxes. The ETF NAV is net of this tax/negative distribution.

https://www.pwlcapital.com/pwl/media/pw ... f?ext=.pdf

So, I am not really sure, but leaning to that it should negatively impact performance/TWRs.

[Mark]

Hi flight,

If you don't want it to be included, and there were no shares sold to pay the tax, simply do not record anything.

If you do want it to be factored into your performance, record it as a negative distribution.