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“How are dividends from foreign stocks taxed?”

As a reminder, This week, we are answering questions on international investing. Today’s topic covers the impact of international investing on your taxes.

Today’s question is:

“How are dividends from foreign stocks taxed?”


Transcript - Taxation of Foreign Stock Dividends

Taxes in the United States are complicated, and as you might expect, it doesn’t get any less complicated combining the U.S tax code with the tax laws of another country. Unfortunately, that is what often happens when investing internationally.

Depending on the country that you are investing in, a certain amount of taxes may be automatically withheld from your dividends and interest payments.

This automatic withholding can cause double taxation for international investors if they aren’t careful, since the IRS may also try and tax those earnings.

Thankfully, there is something called a foreign tax credit that investors can claim to prevent this double taxation.

Put simply, you can apply for a tax credit that is equal to the foreign taxes that you paid, to help offset your tax bill to the IRS.

Generally speaking, If the host country for the stock you are investing in has a tax rate that is higher than the U.S., you will pay no U.S. taxes on those dividends. If the host country has tax rates lower than the U.S. you will be able to subtract the taxes you paid to the other country from your U.S. tax bill.

Notice that this can also have a big impact for those who invest within 401ks and IRAs. Foreign countries will still withhold taxes even if you are investing in a tax sheltered account like a 401k or IRA. And since you would owe no U.S. taxes on that, you will get no tax credit for the taxes withheld on your international investments held in an IRA or 401k.

That means, for investments in certain countries, you may be much better off investing in foreign stocks in a taxable brokerage account, and not a ta deferred account.

Matt Hylland