If you’re a U.S. citizen or resident living abroad, one of the most confusing aspects of your tax obligations is how foreign dividends are taxed. This guide will walk you through how the IRS treats dividend income earned outside the U.S., what qualifies for lower tax rates, how to avoid double taxation, and what additional reporting might be required for expats.
What Are Foreign Dividends?
A foreign dividend is a distribution of cash or property from a foreign corporation to shareholders. According to IRC §316(a), any distribution from a corporation’s income is considered a dividend if paid from profits or retained earnings.
If you’re a U.S. expat, your dividends—whether from U.S. or non-resident corporations—must be reported on your income tax return. It doesn’t matter whether the income is earned in Canadian dollars, euros, or another foreign currency—you must convert it to USD using the appropriate exchange rate.
Are Foreign Dividends Taxable in the U.S.?
Yes. The U.S. taxes worldwide income, which includes foreign dividend income, interest income, and capital gains. Whether the dividend was reinvested, received in cash, or deposited into non-registered accounts, it is still taxable income.
This includes dividends received from:
- Foreign stocks
- Dividend-paying mutual funds
- Foreign affiliates
- Canadian corporations
Foreign dividends received by Canadian residents are subject to withholding tax at the time of payment.
Your tax rate on foreign dividends depends on whether they are considered ordinary or qualified dividends.
Ordinary vs. Qualified Foreign Dividends
Most foreign dividends are considered ordinary income and taxed at your regular income tax rates (10%–37%). However, some qualified foreign dividends may be taxed at the more favorable long-term capital gains rates (0%, 15%, or 20%).
To qualify for these lower rates, the dividend must meet certain criteria. Specifically, the foreign corporation must be:
Incorporated in a U.S. possession, or
Located in a country that has a comprehensive income tax treaty with the U.S. (Canada qualifies), or
Traded on a U.S. stock exchange.
Additionally, you must hold the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date.
Note: Dividends from certain investments—like REITs, MLPs, PFICs, or preferred shares—typically do not qualify for the reduced tax rate.
What Is the Foreign Dividend Tax Treatment for U.S. Expats?
U.S. expats must report foreign dividend income on Form 1040, even if no U.S. tax is ultimately due thanks to the foreign tax credit. If your dividend income and interest income exceed $1,500, you must also file Schedule B.
If you are a U.S. expat residing in Canada and receive dividends from a Canadian company, those dividends must be reported to the IRS. Since the dividends are paid in Canadian dollars, you’ll need to convert the amounts to U.S. dollars using the IRS-recommended exchange rate—typically the annual average rate published by the IRS. This applies not only to Canadian dividends but also to any other foreign-source dividends you may receive.
This applies equally whether the dividends are paid into:
- Personal brokerage accounts
- Mutual funds
- Foreign affiliates
- Stock dividends
Even if dividends are part of your income account, they are still considered taxable amounts for U.S. tax purposes.
[table “32” not found /]Claiming the Foreign Tax Credit on Dividend Income
If you paid tax to a foreign country on your foreign dividends, you may be eligible to claim the foreign tax credit to offset your U.S. taxes. This prevents double taxation on the same investment income.
You’ll file Form 1116 to claim:
- Dividend tax credit
- Federal foreign tax credit
- Foreign taxes paid on dividends
This tax credit is claimed on your income tax return and calculated dollar-for-dollar—reducing your U.S. liability by the foreign taxes paid.
Foreign Earned Income Exclusion vs. Dividends
While expats often use the Foreign Earned Income Exclusion (FEIE) for wages or consulting work, dividends are unearned income and do not qualify for the FEIE. They can only be managed through the foreign tax credit, which is why correct classification is crucial.
Additional Filing Obligations for U.S. Expats
U.S. expats may need to file additional forms based on their holdings in foreign corporations and financial instruments:
- Form 8938: Required if your foreign assets exceed $200,000 (single filers abroad) or $400,000 (joint).
- FBAR (FinCEN 114): Required if total foreign accounts exceed $10,000 during the year.
Both are required in addition to your standard tax return and help the IRS track foreign investment activity.
Examples of U.S. Expat Dividend Tax Scenarios
Example 1: Amy in Dubai
Amy earns $80,000 teaching in Dubai and $12,000 in foreign dividends. Since the UAE has no income tax or tax treaty, she cannot use the dividend tax credit. She excludes her salary using the FEIE and pays U.S. tax on her dividend income.
Example 2: John in the UK
John earns $120,000 and receives $5,000 in foreign dividends from a UK stock. The UK withholds $750 in tax. He claims the foreign tax credit using Form 1116 to offset U.S. taxes.
Example 3: Maria in Spain
Maria earns $95,000 and gets $8,000 in dividend income from Spanish mutual funds. Spain withholds 19% tax. Maria uses Form 1116 to claim the dividend tax credit and carries forward unused tax credit.
How to Report Dividend Tax Paid Abroad
To report foreign dividend tax paid and claim the foreign tax credit for it, follow these steps:
- Determine eligibility for the foreign tax credit
- Use Form 1116:
- Report foreign dividend income
- List foreign tax paid
- Convert with the correct exchange rate
- Total your tax credit
Attach Form 1116 to your tax return to properly claim credits.
Capital Gains and Additional Taxes on Investment Income
Dividends are just one part of investment income. If you also earn capital gains, they are reported separately and taxed differently. Any taxable capital gains must be reported based on the asset’s cost base, sales proceeds, and holding period.
Suppose your net investment income (including dividends, capital gains, and interest income) exceeds $200,000 ($250,000 for joint filers). In that case, you may be subject to the Net Investment Income Tax (NIIT), which imposes an additional 3.8% surtax.
Common Mistakes to Avoid
- Ignoring foreign affiliate reporting
- Forgetting gross up rules for grossed up dividends
- Misreporting stock dividends from a non-resident corporation
- Using the wrong exchange rate
- Misclassifying capital losses
- Failing to apply the correct tax treatment
- Overlooking taxation year rules for non-residents
- Missing mutual funds that pay eligible dividends
Work With Experts Who Understand Expat Taxation
At 1040 Abroad, we help U.S. expats navigate the full scope of U.S. taxation—from handling foreign dividends, interest income, capital gains, and dividend tax credits, to ensuring compliance with IRS rules on non-resident corporations, mutual funds, and foreign affiliates.
We offer free consultations for U.S. citizens living abroad and specialize in cross-border tax matters. Contact us today!
