Foreign Taxes Withheld Problem
Posted by Frugal on May 12th, 2006
A reader John has asked me about how to get the withheld taxes out of the paid dividends back, in my post of “My Dividend Investing ($11775.91 for 2005)”. He said that he has 28% withheld. 28% is a very weird withholding percentage. For all of my stocks, I had 15% withheld for foreign paid dividends. Because I am not sure about his US status (citizenship/green card or foreign). I will explain both.
For all foreigners who have brokerage accounts in the US, I believe 28% or 30% withholding is assessed on all dividends. If the account has an expired W-8 form, any stock sale proceeds in your brokerage account will also be withheld for tax at the same rate. To get that tax back, non-US citizens or anyone who doesn’t have a tax ID in their account MUST register for a tax ID by going to social security agency, and use that tax ID to file tax using 1040NR and reclaim your tax withheld. You also need to contact your brokerage house and make sure that they send you the documentations (1099 form) to prove that you had taxes withheld in your account. Please do make sure that your W8 or W8-BEN form is updated or else you will get lots of money withheld even when you don’t have any gain.
If you are a US citizen or green card holder, but getting foreign taxes withheld by other countries, it is pretty simple to get them back at the tax time. As long as your total withholding is below $300 for single, and below $600 for married joint status, you can put that number (sum of all the numbers in box 6 from your 1099-DIV and 1099-INT) into line#47 of form 1040 as the foreign tax credit, and get all of your money back at the time of filing tax. If you exceed the limit, then you will need to file form 1116 which is quite complex. There are certain types of dividends, for example oil trust, that you cannot get any foreign taxes back. My current tax calculator does not provide calculations for foreign tax credit using form 1116, but it will be implemented soon. You can still enter the number, and the taxes will be calculated correctly.
Let me know if anyone has more questions related to this.
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July 20th, 2006 at 9:51 am
Do you know how to reclaim withheld dividends in an IRA? Since you do not report the income, seems to me that you can’t deduct the foreign taxes. Is this also your understanding? If so, is this a reason to avoid holding foreign dividend-paying stocks in an IRA?
July 20th, 2006 at 10:11 am
You CANNOT reclaim foreign taxes withheld in IRA accounts. I simply don’t buy those stocks in my IRA accounts, because I don’t feel like giving up 15% of my dividends. But even after 15% taxes, those canadian royalty trusts still pay very good dividends.
September 12th, 2006 at 7:20 pm
I had a question on Foreign Tax Credit for previous years [say 1997 to 2005].
Can we claim foreign tax credit for previous 10 years?
if yes, what forms need to be filled along with 1116?
I understand 1040X needs to be filled, but it says on 1040X instructions that generally fill this form to amend 1040 of maximum 3 previous years.
Please advise how to claim for past 10 years, if possible
September 12th, 2006 at 7:37 pm
Sorry, I am pretty sure that the answer is NO for personal taxes. You can only claim for maximum of 3 years, and that’s it.
December 18th, 2006 at 4:13 pm
I’m a bit confused on this with regard to foriegn taxes not being recoverable on divideds from oil trusts. I currently hold shares of PWE, an energy trust, and their tax information given to shareholds says they are a qualified dividend and that foreign taxes are recoverable on Form 1116. Now of course that information is not the law, but I looking at the Form 1116 instructions, I assume you are referreing to this line:
“8. Taxes paid or accrued to a foreign country in connection with the purchase or sale of oil or gas extracted in that country if you do not have an economic interest in the oil or gas, and the purchase price or sales price is different from the fair market value of the oil or gas at the time of the purchase or sale”
This is difficult to determine as it is, but the last part states that that the transactions must be outside of fair market values? What would be the case for that in regards to a stock of a corporation paying dividends?
Also, in Form 1116, it mentions the rules regard the election to take the $300/$600 on Form 1040 line 47 instead of Form 1116. The rules state that even if you take the election the amount must still meet the Form 1116 eligibility rules. This means that you can’t escape and restrictions on claiming foreign tax credits by not filling out 1116.
Are you absolute sure about divideds from oil/gas energy trusts not being eligable?
December 20th, 2006 at 9:14 am
Dave,
You’re asking an extremely good question. Those are the lines that I refer to indeed. Reading the instruction from 1040 form, I believe that you don’t need to file Form 1116 if you don’t have to (less than $300/$600).
However, as you said, I’m not 100% certain on whether you cannot recover those foreign taxes in the case when you file Form 1116. I will try to ask my accountant friend if I get a chance. But I’m not too sure if he will give me the free advice for such specific problems.
From those lines, I believe that unhedged producers of oil/gas trusts will be exempt from 1116. For the hedged producers who sell oil/gas at a “different” price than the market price, they will probably be restricted by Form 1116.
In respect to taxes, I will always say to stay on the safe side. If you find out the answer, let me know here. And if I do find out anything more, maybe I will write up another post.
April 8th, 2007 at 2:53 pm
I hold stock in a foriegn bank in my IRA. They pay a dividend and foriegn taxes are withheld. Although dividends both domestic and foriegn are not currently taxable in an IRA,I have certainly paid a tax. Is this foriegn tax somehow deductible? Thank you.
May 1st, 2007 at 12:48 pm
FIRST SOME BACKGROUND ON FOREIGN WITHHOLDING TAXES: In response to many of the inquiries listed previously… Foreign withholding taxes on investment income (from cross border investments) IS OFTEN AVAILABLE FOR RECOVERY either in part or in its entirety. The level of recovery which is available will be determined by whether there is a treaty between the country of residence of the investor and the country of issue of the security. This is referred to as a double taxation treaty (DTT). Governments by and large understand that you are going to be taxed on your investment at source and again when you bring the money back to your country of residence, hence, a double tax. In order to alleviate this and entice investment into their markets, pairs of countries have enacted DTTs with one another. There are thousands of combinations. The US currently has in place more than 50 such treaties.
IRA accounts are usually treated as a pension fund and are entitled to recover whatever a pension fund would be entitled to recover based on a particular treaty. In many cases they are ENTITLED TO RECOVER ALL OF THE WITHHOLDING.
The Form 1116 is the form for filing to receive a ‘foreign tax credit’ on your US return for taxes already paid to another country. The rule is that you are allowed to take a credit for ALL AMOUNTS THAT ARE NOT RECOVERABLE. In other words, the taxes paid to a foreign jurisdiction which are not in excess of the amount an investor is entitled to by treaty. So the example I will use is a US investor who invests in a Swiss security. The stock pays a dividend and the Swiss tax authority (TA) withholds at a rate of 35% so the investor only receives 65% of the gross dividend. The treaty between the US and Switzerland is at 15% for taxable investors and 0% for pensions (including IRAs). 20% of the gross divided is recoverable by filing a tax reclaim application with the Swiss TA for individuals or corporations and the entire withholding will be recoverable for an IRA or pension fund. For more information: http://www.globetax.com or info@globetax.com
May 7th, 2007 at 2:45 am
Great info, Thanks!
I hold several Canadien oil trusts namely PGH, CNE, and HTE and the dividends are stacking up nicely. I understood when I bought them that the 15% foreign tax withheld was recoverable as long as the dividends were outside my IRA. My problem is that I can’t figure out which box to check at the top of form 1116, thatt is what category these dividends fall under. I have always done my own taxes and the IRS has actually been very nice about it when I screw up. Any help is appreciated.
November 24th, 2007 at 3:13 pm
I have a client who has several thousand dollars held by canadian companies as a result of owning ERF, PGH, PWE and PVX, all canadian energy trusts. How do they get this money back when filing taxes?
November 24th, 2007 at 3:13 pm
I have a client who has several thousand dollars held by canadian companies as a result of owning ERF, PGH, PWE and PVX, all canadian energy trusts. How do they get this money back when filing taxes?
November 24th, 2007 at 3:13 pm
I have a client who has several thousand dollars held by canadian companies as a result of owning ERF, PGH, PWE and PVX, all canadian energy trusts. How do they get this money back when filing taxes?
February 26th, 2008 at 11:40 pm
I have the same question as Mr. Snow. How do I get my money back from PVX when I was taxed at 15%? Also is there a holding period that must be met in order to get this tax back?
April 9th, 2008 at 1:50 pm
Can somebody tell me how to reclaim foreign taxes paid on foreign stocks if the amount exceeds 600 Dollar. I understand
that I need to file Form 1116 with the IRS. But I can’t imagine that the US IRS will refund me the taxes paid to a different
country for example if you hold Nokia stocks paid to Finnland. Does anybody have idea how to proceed ?
Thanks a lot. Oliver
April 9th, 2008 at 8:49 pm
Reclaiming the tax can be complex. Go to http://www.globetax.com for additional information on this subject. GlobeTax will recover foreign withholding tax on a contingent fee basis. Minimum claim size of $100
April 25th, 2008 at 11:54 am
I understand that I can’t reclaim the foreign tax withheld in my IRA account but at the same time I don’t need need to file/pay tax for the dividend I got from my IRA account,right?
So the question is: Is it still worth to hold high-dividend-foreign stocks in an IRA account? My tax bracket is 35%.
September 23rd, 2008 at 8:52 am
I hold FDG in a IRA account and it looks like it may be taken over soon. Will I have to pay the 15% Canadian tax on the buy out amount or on the gain, over what I purchased it for? Thanks Mike