User:Guraaf/Dividends from Foreign Stocks

Dividends from Foreign Stocks A large number of foreign corporations are listed on the U.S. Stock Exchanges such as NYSE and Nasdaq. A few more trade Over-The-Counter (also known as Pink Sheets). Investors with U.S. Stock brokerage accounts can invest in these stocks by buying and selling 'American Depositary Receipts' (ADR) of these companies. Such a foreign company may pay dividends to its investors as approved by its board of directors.

Taxes on Dividends
The dividends paid out to the U.S. investor may be reduced by taxes deducted by the government in which the foreign company is registered. The tax rate depends on the foreign country and whether the country has a tax treaty with the U.S. Internal Revenue of Service (IRS) or not.

Tax Credit
The U.S. IRS code allows a dollar for dollar credit for foreign taxes paid by claiming a credit on the Form 1040. The credit may be claimed without the need for extra forms if the amount of credit claimed is less than $300. For larger credit amounts, an extra form needs to be filled.

However, this foreign tax credit is possible only if the shares of the foreign company are held in a regular brokerage account. No foreign tax is possible if the dividends are paid in a retirement account such as 401(k) or IRA account since there are no income tax returns filed on an annual basis. The retirement account are subject to taxes, if any (e.g., for 401k) at the time of withdrawal and no credit may be claimed for taxes paid.