Are US citizens taxed on foreign dividends?

Published on April 29, 2024
by Clark Stott

Clark Stott has been with Expat Tax Online since 2015. Being a dual national based in the UK, Clark has unique experience helping US citizens (and Accidental Americans) become tax compliant via the Streamlined Tax Amnesty program. Clark likes to help Americans in the UK keep their tax situations as simple as possible to avoid harsh IRS treatment.

Are US citizens taxed on foreign dividends?

Yes, if you’re a US person—which includes citizens, Green Card holders, and resident aliens—you’re taxed on your global income. This includes dividends from companies outside the United States.

What exactly are foreign dividends?

Foreign dividends are payments you receive from companies based abroad. As a US taxpayer, this income is taxed just like your earnings within the States. The process involves specific reporting requirements, and you might be eligible for a tax credit to prevent double taxation.

Do I need to pay US taxes on foreign dividends?

Absolutely. Regardless of where the income originates, if you’re considered a US person, your worldwide income, including foreign dividends, is taxable in the US. The rate and details might vary depending on any tax treaties between the US and the country from which the dividends are paid. 

To prevent being taxed twice—once in the source country and once in the US—you can claim a Foreign Tax Credit for taxes already paid abroad.

Can tax treaties reduce taxes on my foreign dividends?

Certainly. The US holds tax treaties with numerous countries, potentially lowering or even eliminating the withholding taxes on dividends. These treaties can reduce the rate of tax withheld in the foreign country, giving you a break when it comes time to file your US taxes.

Can I reduce taxes on foreign dividends?

Although the Foreign Earned Income Exclusion doesn’t apply to dividends, you have some other options. One effective way is using the Foreign Tax Credit, which helps avoid double taxation by crediting the taxes you paid abroad against your US tax bill.

Alternatively, you can itemize these taxes on Schedule A of your US tax return. Choosing between these depends on which saves you more money. Given the complexity, it might be wise to consult with a tax expert who understands international tax law.

Is it mandatory to report foreign dividends on my US tax return?

Yes, as a US citizen or resident alien, you must report all your global income, including foreign dividends, to the IRS. This holds true whether the dividends were paid out or reinvested. To report accurately, you’ll use forms like the 1040 or 1040-SR and, depending on the circumstances, possibly Schedule B.

What are the risks of not reporting foreign dividends?

Not reporting foreign dividends can seriously backfire. You might face penalties and interest on the unpaid taxes from their due date. Additionally, the IRS might scrutinize your returns more closely, potentially leading to an audit. In severe cases, failing to report can even lead to criminal charges.

How do I ensure I comply with US tax laws on foreign dividends?

  • Educate Yourself: Make sure you understand the IRS rules regarding foreign income.
  • Keep Detailed Records: Document all your foreign income and investments.
  • Utilize Tax Benefits: Don’t overlook credits and deductions, like the Foreign Tax Credit.
  • Consult a Tax Professional: International tax rules can be complex. A tax expert can help ensure you’re following the rules and using all available benefits.

 

By understanding and applying these guidelines, you can manage your tax obligations more effectively and avoid potential issues with the IRS.