Am I Taxed on Foreign Dividends?
Published on May 06, 2024
by Grace Lorraine Angeles
Grace Lorraine, an IRS Enrolled Agent and CPA with 13 years of expat tax experience, specializes in US tax preparation, tax planning, and tax advice for US citizens and Green Card holders living and working abroad.
Table of Contents
Do US expats get their foreign dividends taxed?
Yes, it does. As a US person, which includes citizens, dual nationals, Green Card holders, resident aliens, and domestic legal entities, your worldwide income is subject to US taxation. This global income includes dividends from companies based outside of the United States.
How are foreign dividends different from domestic ones?
Foreign dividends are payments you receive from companies based outside the United States. They are considered part of your global income and are taxed by the US, irrespective of the tax policies of the country where the dividend originates.
Are foreign dividends taxable in the United States?
Yes. All income earned through foreign dividends must be reported to the IRS and is potentially taxable in the US.
However, the US tax system offers mechanisms like the Foreign Tax Credit (FTC) to prevent double taxation—where you would pay taxes on the same income both in the source country and the US. This credit allows you to reduce your US tax liability by the amount of tax already paid to the foreign country.
Can tax treaties reduce taxes on foreign dividends for US expats?
Yes, the US has established tax treaties with numerous countries that can potentially reduce or even eliminate the withholding tax on dividends for US residents. These treaties aim to lower the tax rates imposed by the foreign country, making it easier for US expats to manage their international dividend income without facing excessive taxation.
I want to know more about US taxes abroad
Are there any tax breaks for foreign dividend income?
While the Foreign Earned Income Exclusion (FEIE) does not apply to passive income such as dividends, US taxpayers have other options. Beyond claiming the Foreign Tax Credit, which offsets taxes paid abroad, you can opt to deduct foreign income taxes on your US tax return using Schedule A as an itemized deduction.
Choosing between a deduction and a credit typically depends on which one provides a greater tax benefit, which is often influenced by your overall income and tax situation. It’s recommended to consult a tax professional to clarify which option is more advantageous for your specific circumstances.
Must I report foreign dividends on my US tax return?
Absolutely. If you are a US citizen or resident alien, you must include all foreign dividends as part of your global income when filing your taxes with the Internal Revenue Service (IRS). This holds true regardless of whether these dividends are reinvested or paid out.
Correct reporting involves potentially filling out Form 1040 or 1040-SR and Schedule B, depending on the dividend amount and source.
What are the risks of not reporting foreign dividends?
Not reporting foreign dividends can lead to severe repercussions, including:
- Interest and Penalties: These may accrue on the due taxes from the original deadline.
- Increased IRS Scrutiny: Omitting foreign dividends can trigger an audit, leading to a detailed review of your tax returns and associated financial records.
- Legal Consequences: In severe cases, particularly if non-reporting is seen as fraudulent, you might face criminal charges, resulting in fines or even imprisonment.
How can I stay compliant with US tax laws on foreign dividends?
- Understand Your Tax Obligations: Stay informed about IRS rules for reporting foreign income. Regularly visit the IRS website and review official publications for current guidelines.
- Maintain Accurate Records: Keep detailed accounts of all foreign investments and income, including dividends, regardless of whether they were taxed in the source country or repatriated.
- Maximize Credits and Deductions: Utilize the Foreign Tax Credit and familiarize yourself with how tax treaties between the US and the dividend-source country might benefit you.
- Seek Professional Advice: Consulting with a tax professional who specializes in expatriate taxation is advisable. They can provide tailored advice, ensure accurate tax return preparation, and help with international tax regulations.
