Foreign Taxes Deducted from Dividends

Today TaxMama hears from Jun in Passaic, NJ who asks. “Foreign tax is withheld from my dividends or other investments. Where can I get a credit or deduction on my tax forms?”

Dear Jun,

That’s a very good question. There are two ways to recover the foreign taxes that
are deducted from your investments.

1) Using a Foreign Tax Credit – that directly reduces your taxes – use Form 1116 to report the foreign taxes you paid. How much of a credit you get will depend on the ratio between your foreign income and your total income. http://www.irs.gov/pub/irs-pdf/f1116.pdf

Not only does this require a separate form, which costs you more when your tax return is prepared, but it’s a complicated form, as you can see when you read the instructions.
http://www.irs.gov/pub/irs-pdf/f1116.pdf

There’s an easier way to get some money back – if you’re already itemizing – using Schedule A.

2) You have the option of using Schedule A to report and deduct your foreign taxes – among all the other taxes you pay – on line 8. http://www.irs.gov/pub/irs-pdf/f1040sab.pdf

Instructions to Schedule A http://www.irs.gov/pub/irs-pdf/i1040sa.pdf

Usually, the total of the foreign taxes paid is not high. So either way will work well for you.

If your total foreign taxes paid are substantial, go to a good tax professional who understands the intricacies of the foreign tax options. They’ll be able to play the appropriate tricks with the numbers to get you the highest benefit.

Not all of us know the tricks. For instance, I am not an expert in this area – even with Masters Degree in International Business and decades in taxation. Unless you do this computation all the time, you just don’t learn the tricks. So, I turn to my ‘resident expert’ in Portugal, Roger Adams, who teaches a volunteer tax team operating at the US Embassy in Lisbon. His VECTA team helps US taxpayers in Europe prepare their tax returns. This is the kind of thing he specializes in – and really loves to do. http://irsexam.com/instructors.php#roger
So find someone with his passion and expertise locally…or ask me for his contact information.

And remember, you’ll find answers to questions about foreign taxes and all kinds of tax issues, free. Where? Where else? At TaxMama.com

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  • taxmama :: Where taxes are fun and answers are free
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  • Form 1116 :: Foreign Tax Credit
  • Schedule A :: Use Line 8 for Other Taxes
  • Roger B. Adams :: TaxMama’s foreign tax expert – in Portugal

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