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.
