Foreign Taxes Withheld Problem
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.