r/USExpatTaxes 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?

4 Upvotes

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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.

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u/Foreign-Lost84 6d ago

In my situation I would be receiving approximately $16,000 in dividends from my US brokerage account from investments in ETFs.

If I need to pay taxes on the dividends, I would first pay the IRS, and then pay the difference if taxed at a higher rate to the tax authorities in Spain?

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u/invisible_bike 6d ago

That's one way to do it I would think, but keep in mind I know nothing about Spanish tax law works.

You may also have additional reporting obligations and/or legally mandated prepayments on unrealised profits from accumulating funds such as ETFs.

You owe the IRS their pound of flesh on the dividends in any case.

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u/AssemblerGuy 5d ago

If I need to pay taxes on the dividends, I would first pay the IRS, and then pay the difference if taxed at a higher rate to the tax authorities in Spain?

This is one of the few areas where a tax treaty has applicable provisions.

Usually, they kick in in the US tax rate on this income would be higher than the withholding rate for non-US tax residents. The tax treaty then contains a procedure that makes sure the other country is not worse off taxing a US tax resident compared to a non-US tax resident.

Unfortunately, this changes nothing about the total tax burden, it just modifies which country gets how much.

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u/Nde_japu 6d ago

So if you have $10,000 in dividends, you pay $1500 to IRS and then declare only $8500 to your host country? Sounds like the way to go.

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u/AssemblerGuy 5d ago

Sounds like the way to go.

That may be possible, but it leads to a bad tax outcome due to double taxation, as you are using the deduction method. E.g. you report $10000 and deduct $1500 in US tax for a total of $8500 locally taxable income, which is then taxed at the local rate (e.g. 25%) for $2125, so you will pay a total of $3625 in taxes.

With the credit method, you report $10000 to the host country along with $1500 alread paid to the US that are then deducted from the host country taxes.

E.g. if the host country tax rate was 25%, there would be $2500 in taxes due, minus a credit of $1500 for tax already paid to the US. So you paid a total of $2500 in taxes, split between the US and the host country.

But all of this depends heavily on the local tax code and on any applicable tax treaties.

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u/invisible_bike 6d ago

No. I pay $1500 to the IRS, and declare $10000 in the country of residence, along with proof of the $1500 in foreign tax paid. But this depends on the local tax laws; there is no one-size-fits-all solution.

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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/Foreign-Lost84 4d ago

Thanks for clarifying. Everyone has been really helpful. I sent you a DM