Get Rich with Dividends: A Proven System for Earning Double-Digit Returns

Foreign Taxes

It’s bad enough you have to pay U.S. taxes, now you’re being asked to pay taxes in other countries? Well, yes and no. But don’t worry, you’re not getting taxed twice.

Depending on the tax laws of the country where the company is based, taxes may already be taken out by the time you receive the dividend.

For example, if you are paid a dividend on shares of Telefonica (NYSE: TEF), the Spanish mobile phone company, the government of Spain will help themselves to 19% of your dividend payment.

When you calculate your U.S. taxes, you fill out IRS Form 1116, which will generate a tax credit on the amount paid to a foreign government.

Paying taxes to a foreign government is a pretty regular occurrence. If you’ve ever owned a mutual fund that owns foreign stocks, chances are you’ve paid foreign taxes and had to claim the foreign tax credit before.

Some countries don’t tax you at all, in which case, you’ll just pay the U.S. tax rate. But you’re going to pay someone. Uncle Sam, Uncle Jacques, or Uncle Pedro are going to get their money. You can be sure of that.

There also can be different rules depending on the type of account you hold your stock in. For example, if you own foreign stocks inside an Individual Retirement Account (IRA), you are not eligible for a tax credit. Additionally, your adjusted gross income may impact the amount of the credit that you are eligible for. Be sure to talk to a tax advisor with any questions.