Does anyone know how to offset the double-tax on dividends earned on ADRs? Example: Say the gross dividend is $100. Foreign tax = 15%, so net dividends paid prior to taxes to IRS= $85. IRS tax rate = 25%. Final post-tax dividend = $64. Found some articles on this but wasn’t entirely clear. Does the foreign tax amount end up being a lump-sum tax credit, or is the taxable income reduced by the amount of the tax paid to the foreign entity?
It’s just a credit on your 1040, it’s not like it’s attributable to the dividend. You wind up paying whatever the IRS applicable tax rate is. Your year end statement from your broker will have an amount that says foreign taxes withheld. You compute the tax on the dividend like any domestic one, ie, on the gross amount. When you get to the 2nd page of your 1040 there is a spot for the foreign tax credit. Just plug in the amount the broker form says.
While I’m not a tax preparer, that’s how I’ve always done it. I know there are limits to what is deductable for foreign taxes, but my foreign tax credit is so low, and I am not subject to AMT or anything wonky so I don’t worry much about that.
My understanding is that you get a tax credit for foreign taxes on dividends. So in your example above, you pay the foreign country $15 and the IRS $25, but the IRS credits you $15. So you net pay $25.
its dolla for dolla credit.
or you can try to itemize it i think.
i just take the option that gives me the most money back