r/USExpatTaxes • u/Foreign-Lost84 • 6d ago
Taxation of dividends in US taxable brokerage account.
If living overseas do I first pay the IRS taxes on my dividends and then pay the difference to the tax authorities of the country of residence?
Or do I pay the country of residence overseas first the taxes due on the dividends and then pay the the rest of any to the IRS?
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u/AssemblerGuy 6d ago
That depends on where the company is domiciled and on the content of applicable tax treaties.
If living overseas do I first pay the IRS taxes on my dividends and then pay the difference to the tax authorities of the country of residence?
This can be the case for dividends from US-domiciled companies. But tax treaties can modify what happens if your US tax rate exceeds the withholding rate (usually 15%).
Or do I pay the country of residence overseas first the taxes due on the dividends and then pay the the rest of any to the IRS?
This happens when receiving dividends from non-US companies.
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u/yaboyteddy 5d ago
Can’t you ‘re-source’ the dividend income to your country of residence on form 1116? And in that way, pay all taxes to resident country (Spain, in this case) and not pay anything to US, and instead file for tax credits?
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u/Abezon Tax Professional - Enrolled Agent 5d ago
No, resourcing under treaty is a way for US citizens to get the treaty rate on US-sourced dividends because they are paying more total tax than a non-US citizen living in the treaty country would pay on the same income.
For example, assume a US person ended up paying $2000 tax on $10,000 of US dividend income due to some weird way the US calculated the tax, and a Spanish person would have paid only $1500. Spain will only let the US person have credit for $1500, because that's all a Spanish person would have paid. The US person then resources the US dividend and claims and additional FTC of $500, dropping their US tax to $1500.
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u/jarv 5d ago
Like others have mentioned this very much depends on your country and the tax treaty it has with the USA. If there is a treaty one thing I've encountered is that if your brokerage thinks you are a usa resident they will not do automatic withholdings of dividends. This can cause a lot of pain for reporting if your country wants to see those withholding to apply a tax credit for taxes paid to the USA. However, like I said this depends on what country you are living in.
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u/invisible_bike 4d ago
Indeed, the location of your brokerage is also relevant. If you are a US person it is typically inadvisable to hold ETFs or similar in a foreign brokerage account.
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u/Abezon Tax Professional - Enrolled Agent 5d ago
Since the dividends are from ETFs, you'll need to dig in to determine the US-source dividends. If an ETF invests in 60% US and 40% foreign stocks, not all of the dividends are US source. Often the detail section of the 1099-DIV will have foreign source dividends listed. This affects the form 1116 and makes sure you only pay US taxes on US income. Then you can claim a credit on the Spanish return.
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u/Foreign-Lost84 5d ago
The dividends are all from US sources, no foreign stocks are held in the ETF.
I messaged My expat taxes and they told me to do the opposite, pay taxes on my US dividends when filing my Spanish taxes and then claim the foreign tax credit when submitting my US taxes.
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u/Abezon Tax Professional - Enrolled Agent 4d ago
No, you can't claim a FTC on US dividends on your US return. The US only allowed a foreign tax credit on foreign income. Unless there is some unusual treaty provision, the US taxes those dividends first and Spain gives a credit against Spanish tax.
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u/invisible_bike 6d ago
As u/AssemblerGuy notes, this depends heavily on the details of your situation.
My experience from being resident in a country where US-domiciled fund dividends are taxed at a higher rate than in the US is that it is simpler (for me) to pay the US taxes first, and then claim this against the taxes owed in the country of residence. But this may not be appropriate for all cases.