Tax on Foreign Dividends
Published on March 04, 2024
by Deborshi Choudhury, EA
Deborshi Choudhury, an IRS Enrolled Agent with 16 years of expat tax experience, specializes in U.S. tax preparation, tax planning, and tax advice for US citizens and Green Card holders living and working in the UAE and Canada.
Table of Contents
Am I taxed on foreign dividends?
Yes, the United States taxes US persons on their worldwide income, which includes foreign dividends.
What are foreign dividends?
Foreign dividends refer to dividend payments received from companies based outside of the United States. For US taxpayers, including expatriates, these dividends are part of their global income subject to US taxation, irrespective of the tax policies of the country where the dividend originates.
It’s important to distinguish foreign dividends from domestic dividends because the US tax treatment involves specific reporting requirements and the potential for a tax credit to avoid double taxation.
Are foreign dividends taxable in the United States?
Definitely, yes. If you are a US person, which includes citizens, dual nationals, Green Card holders, resident aliens, and domestic legal entities, you are subject to US tax on your global income. This global income includes money earned through foreign dividends.
While the tax rates and specifics may vary depending on agreements between the US and the country from which you receive dividends (such as tax treaties), the baseline requirement does not change: you need to report and potentially pay taxes on these earnings in the US.
However, to avoid double taxation—being taxed both in the source country and the US—taxpayers may claim a Foreign Tax Credit (FTC) if they paid taxes on these dividends to the foreign country. This credit reduces the US tax liability on a dollar-for-dollar basis for the amount of foreign taxes paid.
Are there any tax treaties that can reduce the tax on foreign dividends?
Yes, the United States has tax treaties with many countries that can reduce or eliminate withholding tax on dividends for US residents.
If a tax treaty exists between the US and the country from which the dividends originate, the treaty may allow a lower withholding rate on dividends than the foreign country’s domestic rate.
Are there any exclusions or deductions available for foreign dividend income?
While the Foreign Earned Income Exclusion (FEIE) allows US taxpayers living abroad to exclude a certain amount of their foreign-earned income from US taxation, it does not apply to passive income such as dividends.
However, besides the Foreign Tax Credit, taxpayers may opt to deduct foreign income taxes as an itemized deduction on Schedule A of their US tax return, though this is generally less beneficial than the credit. The decision between taking a deduction or a credit should be based on which option provides the greater tax benefit, and it may vary depending on the individual’s total income and tax situation.
It’s important to note that specific qualifications must be met to claim these benefits, and the rules can be complex. Therefore, consulting with a tax professional knowledgeable in international tax law is advisable​.
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Do I need to report foreign dividends on my US tax return?
Yes, if you are a US citizen or resident alien, you are required to report your worldwide income to the Internal Revenue Service (IRS), including foreign dividends. This requirement applies regardless of whether the foreign dividends are reinvested or actually paid out to you.
Reporting foreign income ensures that all your global earnings are accounted for according to US tax laws. To correctly report these dividends, you may need to fill out specific forms such as Form 1040 or 1040-SR and possibly Schedule B, depending on the amount and source of the dividends.
What happens if I don’t report foreign dividends?
Failing to report foreign dividends can lead to a range of consequences, including:
- Interest and Penalties: The IRS may impose late payment penalties and interest on unpaid taxes from the date they were due.
- Increased Scrutiny: The IRS pays close attention to international transactions. Not reporting foreign dividends could trigger an audit, during which the IRS will closely examine your tax returns and related documentation.
- Legal Repercussions: In extreme cases, particularly where non-reporting is deemed fraudulent, there could be criminal charges leading to fines or imprisonment.
How can I ensure compliance with US tax laws regarding foreign dividends?
- Understand Your Obligations: Familiarize yourself with the IRS requirements for reporting foreign income. The IRS website and official publications are good resources for up-to-date information.
- Accurate Record-Keeping: Keep detailed records of all foreign investments and income, including dividends, even if they were taxed abroad or not repatriated to the US.
- Utilize Available Credits and Deductions: Take advantage of the Foreign Tax Credit and understand how tax treaties between the US and the country from which you receive dividends might benefit you.
- Seek Professional Help: Tax laws can be complex, especially when dealing with them internationally. Consulting with a tax professional who has expertise in expatriate taxes can provide personalized advice and ensure that your returns are correctly prepared.
Tax professionals are invaluable in the complex landscape of international taxation; they offer strategies to minimize liabilities and ensure compliance. Their expertise can help you understand your reporting obligations, claim eligible deductions and credits, and help avoid the problems associated with double taxation​.
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