Taxation of foreign dividends: How to report US tax, withholding, and foreign tax credits
The taxation of foreign dividends can be complex for US taxpayers, especially expats who invest globally. Tax obligations and withholding requirements vary, but proper reporting helps you avoid double taxation and stay compliant.
What you'll learn:
- How qualified vs. ordinary dividends affect your tax rate
- When the Foreign Tax Credit (FTC) reduces your US tax liability
- Which IRS forms do you need to report foreign dividend income
- Common mistakes that lead to penalties or overpayment
Foreign dividends are fully taxable in the US, but you can claim a credit for foreign taxes paid. Proper classification and applying the FTC rules correctly will help minimize your tax burden.
For dividend basics, see IRS Topic 404.
What are foreign dividends?
Foreign dividends are distributions of earnings made by foreign corporations to their shareholders. Under US tax law (IRC §316), a dividend is any distribution of property made by a corporation to its shareholders from earnings and profits.
For dividends to be considered foreign, the paying corporation must be organized outside the US. It’s important to distinguish who paid the dividend (the foreign corporation) from whether the dividend is foreign-source income, which matters for Foreign Tax Credit limitation calculations.
Foreign dividends can come from stocks, mutual funds, or other investments in foreign companies. Recognizing what qualifies as a foreign dividend is important for correct tax reporting and eligibility for special tax treatment.
Are foreign dividends taxable in the US?
Yes. The US taxes its citizens and residents on their worldwide income, which includes foreign dividends.
Common sources of foreign dividends include shares in foreign companies, international mutual funds, and foreign exchange-traded funds (ETFs). Regardless of the dividend’s country of origin or the currency in which it’s paid, all foreign dividends must be reported on your US tax return. You must report them in USD even if paid in foreign currency.
For currency conversion consistency, refer to the IRS yearly average currency exchange rates.
Ordinary vs. qualified foreign dividends
Foreign dividends fall into two categories for tax purposes: ordinary and qualified.
- Ordinary foreign dividends are taxed at your ordinary income tax rate.
- Qualified foreign dividends enjoy lower tax rates, similar to long-term capital gains.
To qualify, a foreign dividend must meet specific criteria:
- Paid by a qualified foreign corporation – The dividend must come from a corporation that either: Is incorporated in a US possession, OR Is eligible under a comprehensive income tax treaty with the US that meets IRC §1(h)(11) requirements
- Meets the holding period rule – You must hold the stock for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date
- Not excluded – Certain dividends don't qualify, such as:
- Dividends from corporations that don't meet treaty tests
- Dividends from Passive Foreign Investment Companies (PFICs)
- Certain other non-qualified dividends specified by the IRS
For detailed qualified dividend criteria and holding period rules, see IRS Publication 550.
If these conditions are not met, the dividend from a foreign company is taxable as ordinary income rather than at the preferential qualified rate.
Foreign dividend income reporting
Proper reporting of foreign dividend income is critical for US taxpayers.
Where it goes on Form 1040
Understanding where to report dividends on your Form 1040 prevents common filing errors:
- Qualified dividends → Line 3a (taxed at preferential capital gains rates)
- Ordinary dividends → Line 3b (taxed at ordinary income rates)
This distinction is crucial because it directly affects your tax rate. Misclassifying qualified dividends as ordinary can result in significantly higher taxes.
For more details, see the IRS 1099-DIV FAQ on Form 1040 lines.
Filing requirements and IRS forms
Here's a checklist of common IRS forms related to foreign dividends:
- Form 1040: Report total dividend income on your annual individual tax return.
- Schedule B: If your total dividends and interest exceed $1,500, you must complete Schedule B, which asks yes/no questions about foreign accounts. It may also be required for certain foreign-account or foreign-trust situations, even if your dividend or interest income is below $1,500.
- Form 1116: To claim a Foreign Tax Credit (FTC) for foreign taxes paid, use this form.
- FBAR (FinCEN Form 114) and FATCA (Form 8938): If your foreign financial accounts exceed certain thresholds, you must report them via these forms.
Always keep accurate records of dividend payments, foreign taxes withheld, and currency conversions for proper filing and compliance.
Avoiding double taxation
The US tax system provides the Foreign Tax Credit (FTC) to prevent double taxation on foreign dividends.
You can claim a credit against your US tax on foreign dividends for taxes paid to foreign governments. This credit reduces or eliminates double taxation. However, the FTC is subject to limitations based on income baskets and calculations. If you cannot use all your foreign tax credit in the current year, unused credits may be carried back one year or forward up to ten years (where allowed).
Tax treaties between the US and many countries often reduce foreign tax withholding on dividends, depending on the specific treaty and article, easing your overall tax burden.
Foreign Tax Credit (FTC) and tax treaties
Example: If you earn $1,000 in foreign dividends taxed at 15% abroad, you pay $150 in foreign tax. You owe $200 in US tax on the $1,000, but claiming the foreign tax credit on dividends reduces your US tax by the $150 paid overseas, so you pay $50 more to the IRS.
Keep in mind, your FTC may be limited based on your income, and you may not be able to use all foreign tax paid on dividends in the current year.
Dividends vs. exclusion of foreign earned income
The Foreign Earned Income Exclusion (FEIE) does not apply to dividends. FEIE covers earned income, such as wages and salaries, but investment income, like dividends, is fully taxable and must be reported.
Additional filing requirements for US expats
US expats must comply with additional reporting rules for foreign financial accounts holding dividends. It's important to understand that FBAR and Form 8938 are separate requirements with different thresholds. You may have to file one, both, or neither, depending on your situation.
- FBAR (FinCEN Form 114): File if foreign accounts aggregate over $10,000 at any point in the year (aggregate value over $10,000 at any time during the year).
- FATCA (Form 8938): Report foreign financial assets exceeding IRS thresholds, which vary based on filing status and whether you live abroad.
Failing to file these can result in severe penalties, so compliance is critical.
Examples of US expatriate dividend tax scenarios
Example 1: Non-treaty country
An expat in a country without a tax treaty may face higher foreign withholding (e.g., 30%). While you may have more foreign tax withheld, your Foreign Tax Credit (FTC) may still be limited by US rules.
Example: €1,000 dividend = $1,080 USD, with $324 withheld. Report qualified dividends on Form 1040 line 3a and total dividends on line 3b, then claim the FTC on Form 1116.
Example 2: Treaty country
A treaty country often reduces withholding to 15%, lowering foreign tax paid and simplifying your FTC claim. However, treaty benefits depend on eligibility and the specific treaty article – don’t assume automatic relief.
This also ties to qualified foreign corporation rules. Example: Report qualified dividends on line 3a and total dividends on line 3b, then claim the FTC on Form 1116.
Example 3: PFIC / complex investment
Many non-US mutual funds or ETFs can be PFICs, triggering punitive rules and requiring extra forms like Form 8621. PFIC dividends may lose preferential rates, and reporting can be complex.
Capital gains and additional taxes on investment income
Capital gains on foreign investments are taxed differently from dividends, generally at favorable long-term rates.
High-income taxpayers may also be subject to the Net Investment Income Tax (NIIT), a 3.8% surtax on investment income. NIIT applies based on Modified Adjusted Gross Income (MAGI) thresholds and includes dividends as well as capital gains.
Common mistakes to avoid
Using incorrect exchange rates for currency conversion
- Forgetting to report foreign dividends on Schedule B
- Misclassifying ordinary dividends as qualified
- Failing to file the required FBAR or FATCA forms
Avoid these errors to ensure accurate reporting and minimize penalties.
Conclusion
Understanding the taxation of foreign dividends is crucial for US expats to stay compliant and optimize tax outcomes. Here's your action plan:
- Check qualified status: Verify if your foreign dividends meet qualified dividend criteria (corporation, holding period, no PFIC exclusions).
- Confirm FTC eligibility and limitations: Calculate your Foreign Tax Credit and understand how limitations may affect you.
- Ensure FBAR/8938 compliance: Determine if you need to file FBAR, Form 8938, or both based on your foreign account balances.
Reporting requirements, tax credits, and treaty benefits can significantly affect your tax liability. Consult a tax professional for personalized advice and to ensure you take full advantage of available credits and deductions.
FAQs
Yes. The US taxes citizens and residents on worldwide income, including all foreign dividends. You must report them on your tax return regardless of currency or location, even if you qualify for the Foreign Earned Income Exclusion, which only applies to earned income.
Yes, by claiming the Foreign Tax Credit (FTC) for taxes paid to foreign governments. The FTC reduces your US tax liability dollar-for-dollar, subject to limitations. Unused credits can generally be carried forward for up to ten years.
Yes. FEIE applies only to earned income such as wages, not investment income. Foreign dividends are fully taxable and must be reported on Form 1040. You may use the Foreign Tax Credit to offset foreign taxes paid.
Not always. Foreign dividends may be ordinary or qualified. Qualified dividends from qualified foreign corporations are taxed at preferential rates (0%, 15%, or 20%) if holding-period requirements are met. Ordinary dividends are taxed at regular income tax rates.
Report 401(k) contributions and distributions on Form 1040. Contributions to traditional 401(k)s reduce taxable income, while distributions are taxed as ordinary income. US 401(k)s generally do not require FBAR reporting, though foreign retirement accounts may.
Report qualified dividends on Line 3a and total dividends on Line 3b. Qualified dividends receive preferential tax rates (0%, 15%, or 20%), while ordinary dividends are taxed at your regular income tax rate.
Use the IRS yearly average exchange rate for the tax year or the exchange rate on the date you received the dividend. Apply the same method consistently throughout the year and keep records to support your filings.
