How to Report Foreign Stock Dividends on Your U.S. Tax Return

Introduction

Investing in foreign stocks can provide diversification and potentially high returns, but it also comes with complex tax reporting requirements. If you receive dividends from international investments, the IRS requires you to report them as taxable income. Additionally, many foreign governments withhold taxes on dividends paid to U.S. investors, creating a risk of double taxation.

To avoid overpaying, investors must understand how to report foreign stock dividends correctly, how to claim foreign tax credits, and strategies to minimize tax liabilities.

This article explains the U.S. tax treatment of foreign dividends, required IRS forms, and methods to avoid double taxation.

1. Are Foreign Stock Dividends Taxable in the U.S.?

Yes, foreign dividends are fully taxable for U.S. citizens and residents, just like dividends from U.S. companies. This means:

• Dividends from foreign stocks must be reported as income on your U.S. tax return.
• If foreign taxes were withheld, you may be eligible for a Foreign Tax Credit (FTC) or deduction to avoid double taxation.
• Tax rates on foreign dividends depend on whether they are qualified or non-qualified dividends.

Qualified vs. Non-Qualified Foreign Dividends

• Qualified dividends: Taxed at the lower long-term capital gains rates (0%, 15%, or 20%) if they meet IRS eligibility criteria.
• Non-qualified dividends: Taxed as ordinary income at marginal tax rates (up to 37%).
• Eligibility for the lower tax rate depends on whether the foreign company is:
  • Based in a country with a U.S. tax treaty.
  • Traded on a U.S. stock exchange or an eligible foreign exchange.
  • Meeting the IRS’s holding period requirement.

2. How to Report Foreign Dividends on Your U.S. Tax Return

Step 1: Report Foreign Dividend Income on Form 1040

• If you receive any foreign dividends, they must be reported on Schedule B of Form 1040.
• If total dividends exceed $1,500, additional reporting is required.

Step 2: Report Foreign Taxes Paid on Form 1116 (Foreign Tax Credit)

• If foreign taxes were withheld from your dividends, you can claim a tax credit to offset U.S. tax liabilities.
• Form 1116 allows you to reduce your U.S. tax bill by the amount of foreign tax paid, subject to limitations.
• If the foreign tax paid is $300 or less ($600 for joint filers), you may be able to claim a direct deduction instead of filing Form 1116.

Step 3: File FBAR and FATCA (If Required)

• FBAR (Foreign Bank Account Report): If total foreign financial assets exceed $10,000, you must report foreign brokerage accounts holding dividend-paying stocks.
• FATCA (Form 8938): Required if foreign assets exceed $50,000 for individuals ($100,000 for joint filers).

3. Foreign Tax Withholding on Dividends

Many foreign governments automatically withhold taxes on dividends paid to U.S. investors, typically between 10% and 30%. However, you may reduce or eliminate foreign withholding tax by using:

• Tax treaties: The U.S. has tax treaties with over 60 countries, which may allow lower withholding tax rates.
• Filing a tax reclaim with the foreign country: Some investors can recover a portion of withheld taxes through their foreign tax authority.

4. Strategies to Minimize Taxes on Foreign Dividends

Invest Through Tax-Advantaged Accounts

• Foreign dividends earned in retirement accounts (IRAs, 401(k)s) are tax-deferred and not subject to immediate U.S. tax.
• However, foreign withholding tax may still apply, and credits for taxes paid cannot be claimed inside retirement accounts.

Invest in U.S.-Based Funds That Hold Foreign Stocks

• International mutual funds or ETFs based in the U.S. often handle foreign tax withholding on behalf of investors.
• This simplifies tax reporting and allows investors to still claim foreign tax credits at the fund level.

Hold Stocks Long Enough to Qualify for Lower Tax Rates

• If possible, meet the IRS’s holding period requirement to qualify for lower capital gains tax rates on dividends.

Use Tax-Loss Harvesting to Offset Dividend Taxes

• Selling underperforming assets to offset taxable dividend income can lower overall tax liabilities.

5. Common Mistakes When Reporting Foreign Dividends

• Failing to report small amounts: Even small dividends must be reported to the IRS.
• Not claiming foreign tax credits: Without claiming FTC, you may end up paying double tax on the same income.
• Ignoring FBAR and FATCA obligations: If your foreign investments exceed reporting thresholds, you must disclose them separately to the U.S. Treasury.
• Assuming all foreign dividends qualify for reduced tax rates: Some dividends may be taxed as ordinary income due to holding period requirements.

Conclusion

U.S. taxpayers must report all foreign stock dividends on their tax returns, but claiming foreign tax credits can help prevent double taxation. Careful planning, using tax treaties, and investing through U.S.-based international funds can simplify reporting and minimize tax burdens. 

Tax Partners can assist investors in properly reporting foreign dividends, maximizing tax benefits, and ensuring full IRS compliance.

This article is written for educational purposes.

Should you have any inquiries, please do not hesitate to contact us at (905) 836-8755, via email at [email protected], or by visiting our website at www.taxpartners.ca.

Tax Partners has been operational since 1981 and is recognized as one of the leading tax and accounting firms in North America. Contact us today for a FREE initial consultation appointment.