How to Calculate Foreign Dividends Received

Understanding foreign dividends is important for U.S. taxpayers who invest internationally. Foreign dividends are distributions of earnings made by corporations located outside the United States to their shareholders. These payments can originate from various sources, including direct investments in foreign companies, international mutual funds, or foreign exchange-traded funds (ETFs).

U.S. tax law mandates that citizens and residents report their worldwide income, which encompasses all foreign dividends, regardless of the country of origin or the currency in which they are paid. Properly calculating and reporting these dividends is necessary for tax compliance and to potentially mitigate double taxation, where income might be taxed by both the foreign country and the U.S.

Sources of Foreign Dividend Information

Accurately calculating foreign dividends for U.S. tax purposes requires specific pieces of information. Taxpayers need to determine the gross dividend amount received, the exact date of receipt, the foreign currency in which the dividend was paid, and any foreign taxes that were withheld.

Foreign broker statements often serve as a primary source for this data, providing a clear record of transactions. These statements typically itemize the dividend amount, the currency used, the date it was paid, and any foreign taxes deducted at the source. If investments are held through a U.S. broker, a Form 1099-DIV may be issued, which should include details of foreign taxes paid.

In cases where a Form 1099-DIV does not provide all necessary foreign tax information, or if investments are held directly with a foreign institution, taxpayers may need to consult annual reports from the foreign company or other documentation provided by the foreign financial institution. Accurate documentation from all sources is crucial for substantiating reported amounts to the Internal Revenue Service (IRS).

Converting Foreign Currency Dividends

Converting foreign currency dividend amounts into U.S. dollars is a necessary step for U.S. tax reporting. The Internal Revenue Service (IRS) generally requires that income received in foreign currency be converted to U.S. dollars using the exchange rate on the date the income was received.

For regular income, including dividends, taxpayers can typically use the spot rate on the date of receipt. However, if the dividend income is received fairly evenly throughout the tax year, the IRS may allow the use of an average exchange rate for the entire tax year. This average rate can simplify calculations, but taxpayers should confirm this method is permissible with IRS guidance. Reliable exchange rates can be found from various sources, including the Treasury Department’s website, which publishes yearly average exchange rates, or reputable financial data providers like OANDA.

Currency fluctuations between the dividend payment date and the date of conversion can impact the U.S. dollar equivalent of the dividend. A strengthening U.S. dollar relative to the foreign currency will result in a lower U.S. dollar value for the dividend, while a weakening U.S. dollar will lead to a higher U.S. dollar value.

Accounting for Foreign Taxes on Dividends

Foreign taxes withheld on dividends can impact a U.S. taxpayer’s overall tax liability. Many foreign countries impose a withholding tax on dividends paid to non-resident shareholders. To prevent income from being taxed twice—once by the foreign country and again by the United States—U.S. tax law offers mechanisms to alleviate this double taxation.

Taxpayers generally have two primary methods for accounting for foreign taxes paid on dividends: claiming a foreign tax credit or taking an itemized deduction. The foreign tax credit (FTC) is typically more advantageous as it reduces U.S. tax liability dollar-for-dollar for qualifying foreign income taxes paid.

To qualify for the foreign tax credit, the foreign tax must be a legal and actual foreign income tax, or a tax in lieu of an income tax, and it must have been paid or accrued. While the credit can offset U.S. tax on foreign-source income, there are limitations on the amount of credit that can be claimed, generally capped at the U.S. tax attributable to that foreign income. Taxpayers with small amounts of foreign tax paid may be able to claim the credit without filing a complex form, provided certain conditions are met. Alternatively, taxpayers can choose to deduct foreign income taxes as an itemized deduction on Schedule A (Form 1040), but this option is usually less beneficial than the credit because a deduction only reduces taxable income, not the tax liability directly.

Reporting Foreign Dividends for U.S. Tax Purposes

After calculating the U.S. dollar equivalent of foreign dividends and determining the foreign taxes paid, taxpayers must report this information on their U.S. federal income tax return. The primary form for reporting dividend income, including foreign dividends, is Schedule B, Interest and Ordinary Dividends, which is an attachment to Form 1040.

On Schedule B, taxpayers will list the amount of ordinary dividends received, which includes the U.S. dollar value of foreign dividends. If the foreign dividends meet specific criteria, they may qualify for lower tax rates as “qualified dividends,” similar to long-term capital gains, and would be reported separately on Form 1040 or Schedule D. However, many foreign dividends are considered ordinary income and are taxed at regular income tax rates unless a tax treaty or other specific criteria apply.

To claim the foreign tax credit for taxes paid on foreign dividends, taxpayers must generally complete and attach Form 1116, Foreign Tax Credit (Individual, Estate, or Trust), to their Form 1040. Form 1116 calculates the allowable foreign tax credit based on the amount of foreign taxes paid and the taxpayer’s U.S. tax liability attributable to foreign source income. Taxpayers must input the calculated U.S. dollar dividend amount and the foreign tax credit amount onto the respective lines of these forms.