US bond ETFs - 1042S and IB dividend report disagreement

Hey is anyone here invested in US bond ETFS like BND, TLT, VGLT. etc?

I’m doing my taxes and noticed that US tax withholding in 1042S form and in IB’s activity reports disagree with each other.

The latter says IB withheld 15% from bond ETFs distribution. But 1042S only seems to report withholding from US stock ETF distributions, whereas for bond ETFs it only report gross income as income code 1 but says withholding is $0. What’s up with that? Can I still claim refund for these 15% with DA-1? Did they ask for 1042S or is dividend report showing that IB did in fact withheld 15% to US suffice?

Unfortunately, I have not yet found a way to click directly on the cash account and then view all credits. Therefore we have to rely on the Activity Statment and accordingly I assume that 15% withholding tax for the bond etf was deducted from your account. I would put this on the DA1, try to get the refund and attach the Activity Statement to the tax return. The 1042S is a US tax form and the Swiss tax authorities are probably not interested. Usually, interest distributions are exempt from US withholding tax (portfolio interest exemption) but it is possible that a part of it is classified as dividend… Alternatively, you may need to contact customer support. You could also check if the Swiss feder tax office has the distributions on their ICTax, that might help as well

US bonds are not withheld at 15% (because income from interests has no withholding). So if you ask for a full refund you’d be cheating on taxes.

What IB does is do 15% withholding, then in Q1 vanguard publishes the actual withholding rates and IB refunds you. The number in 1042-S is the correct one.

When I still had BND, I’d manually figure out the correct withholding and manually enter it in DA-1. It was quite a bit of pain to get the right number but it would usually match the 1042-S in the end. One way is to use the spreadsheet that are available in vanguards website iirc.

The first year I didn’t notice the discrepancy, good thing is that I had included the 1042-S and they ended up correcting on their side (basically using the number from 1042-S rather than the one I was asking for).

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That’s why I fail to see how it should be relied on for Swiss tax purposes.

What would you use? I don’t think ib would provide any other documentation regarding us withholding.

That’s “Statement of Funds” section in activity reports.

Oh but IB does withhold 15% for them, that’s what the activity statement says! At least for bond ETFs - I had BND and VGLT, both got money withheld by IB.

How can I see if I got this refund? I checked “Statement of Funds” section of activity report and all it has are dividend credits followed each time by 15% debit for “US Tax”. I don’t find the refund that you speak of there. Did you get them yourself? What does it look like and at what dates do they usually credit them?

Dividends & Withholding Tax section of activity statement (you can generate a report just with these two to avoid sharing too much details with the tax man) lists them with 15% withholding. That’s what I’m planning to submit with DA-1

Well it makes it kind of important in double taxation disputes because it’s the primary document that says how much the broker thinks the US government wants to tax you on this income. And because it’s US sourced income they get the first dibs at it before the swiss, per treaty.

So here I am finding myself with this document saying $0 on one hand, and IB’s statements saying they did withheld 15% for “US Tax” on the other hand

That’s what I mentioned, there’s an initial 15% withholding (IB can’t know until vanguard tells them). But in March of the following year they give you money back.

For me it appears as a positive entry in Withholding tax in my statement (with a date from past year).

Note that 1042-S has multiple pages (I guess for various type of income), only one is non-zero (for me with IB).

This is what my (custom) report for tax purposes looks like:

Crucially this does not necessarily equal the amount of tax withheld.
Neither does it take into account the DTA applying to you.

I.e., the U.S., just like any other country, might want to tax you - depending on your personal circumstances - where no withholding tax was withheld (yet). Or a higher amount tax than has been withheld so far.

Conversely, it might not want to tax you on amounts on which WHT was actually withheld. Or only an lower than the amount of tax withheld.

Hmm yeah, unfortunately it’s incorrect for bond funds, at least for me since the refund are split over two years. Anyway for taxes I give a similar statement + matching 1042-S and never had issue (except the first year, where they corrected by using the number from 1042-S instead of the one from the statement and they were right).

Doesn’t Vanguard pay out gross amounts to IBKR - and IBKR withholds a portion of that as a withholding agent?

U.S.-domiciled bond ETFs?

Yes, but IBKR withholds the standard 15%, it doesn’t know how much of the BND dividend comes from interest vs. other. My understanding is that in March, Vanguard publishes all the detailed data, IBKR refunds the withholding and issues corresponding 1042-S.

In the broker statement this refund appears in the year N+1 statement (but with a year N date). But I just looked back, I think the “dividend report” contains the correct data (those show like 75 USD dividend, 1 USD withheld). I guess if you include that, it should work too.

Exactly (BND in my case, iirc BNDX had regular 15% withholding)

Don’t think I’m able to wrap my head around it this late at night.
But I have never held US-domiciled bond ETFs at IBKR (and don’t see the advantage, as in ETFs with a large percentage of US stock dividends).

I found the BND on telekurs (dataprovider). According to this information the distributions of the Total bond market etf are actually treated as dividends and therefore with tax deduction. Nor have they been re-classified as interest in 2019. So you should find the dividends on your 1042S with Income Code 6 and 15% tax deduction and you can have them credited to your DA1 (at least the BND). I guess further info about why the distributions are treated as dividends could be found in the ETF prospectus

I didn’t have BND in 2019 (sold it in 2018), but I doubt that’s correct, it’s unlikely to have changed between those two years.

Screenshot from 2020-07-08 09-17-25

That’s the thing, they are not. My distributions from BND are reported on 1042-S as Income Code 1 with Federal tax withheld of whopping $0. Yet IB did withheld 15% from each distribution (per “Statement of Funds” detailing cash movements) and I still can’t seem to find where they refunded it

Did you check the last 3 pages (out of 9)? For me the first 6 show 0, the last 3 show the actual withholding.

Also what does your dividend report from IB show? (iirc it’s one of the report in the tax tab).

Ok I checked and saw that the distributions of BND in 2018 and 2019 at banks that have Citibank US as custodian have been accounted for as dividends with the corresponding tax deduction (and some capital gains in 2018). It is possible that IB uses another custodian and was informed in 2019 that these were dividends (another plus for IB at least for 2018 :)) . As mentioned before, I would write to the customer support if you don’t find the deduction on your 1042 and list the deductions on DA1, otherwise you will give the state a few CHF :slight_smile: respectivelly ypu could be double taxed. Wallstreet concepts (another US data provider) also reports them as dividends, but it seems that it is not an exact science sometimes… However, just my experience, i’ve never been asked for the 1042 by the tax office and I wouldn’t bother to correct unless they asked for it

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