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I read in the Turbotax instructions in the section "Deductions & Credits" -> "Income From Foreign Countries" for dividend income:

When you have foreign income from multiple countries, the IRS requires you to report it per country, unless it comes from a Regulated Investment Company (RIC).

Why does the IRS require US taxpayers to report dividend income per country, instead of simply allowing taxpayers to mark them as "foreign"?


I did read:

NOTE: A foreign tax credit is NOT allowed from the following countries: Cuba (until 12/21/2015), Iran, North Korea, Sudan, and Syria.

so assuming that none of the dividends come from one of these banned countries, I don't see why the IRS has such a requirement, which is quite tedious to respect in Turbotax, as Turbotax requires one 1099-DIV for each country for which we want to report foreign tax:

Example: Let's say your Form 1099-DIV reports $1,000 in dividends. $100 from France, $50 from Canada and $850 from the US. Rather than entering one Form 1099-DIV, you'll enter three of them. The first copy is for $850 with no foreign tax since it's US income. The second copy is $100 with foreign tax equal to what you paid France. The third copy is $50 with foreign tax equal to what you paid Canada.

E.g., if one Fidelity's account has received dividends from 10 countries, then one has to divide Fidelity's 1099-DIV into 10 different 1099-DIV forms oneself assuming dividends don't come from RICs. And if one has 5 US brokerage accounts, each of them with receiving dividends from 10 countries, then one must enter 50 different (= 5 x 10) 1099-DIV forms in Turbotax if one seeks foreign tax credit.

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  • Isn't Fidelity a regulated investment company? So one reports the foreign income amount Fidelity provides on the 1099 it sends you. At least that's how it works for me, receiving a 1099 from another large mutual fund company. And as a practical matter, I have absolutely no clue as to what countries I'm getting dividends from, or how they divide between countries.
    – jamesqf
    May 16 at 4:23
  • @jamesqf then how do you seek foreign tax credits? The IRS says no need to divide per country only if dividends come from RIC. E.g. VWO ETF in fidelity will yield foreign dividends from non-RIC companies. May 16 at 4:43
  • While I don't know about ETFs specifically, for ordinary mutual funds the company sends me a 1099-DIV for that fund, not the underlying securities it owns. So I just enter the total on Schedule 3 of my Form 1040. The mutual fund IS the regulated investment company. (I'd assume the same is true for ETF, though I'm not sure, since I don't own any.) The per-country requirement is for when you own the foreign stocks directly.
    – jamesqf
    May 16 at 18:09
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    I'm certainly not a tax lawyer, accountant, or anything of the sort. However, I have owned international mutual funds for decades. The companies have always sent me 1099-DIV forms with a simple total for each fund. I have just added them up, and put the total in the appropriate box of my 1040. And as I said, trying to unwind all the different country investments involved in the fund would be a monumental task, I wouldn't even know where to get the needed info.
    – jamesqf
    May 17 at 2:25
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    @jamesqf got it, yes for mutual funds one can simply indicate RIC in the foreign tax credit form. The pain starts when directly owning foreign stocks (eg, via ADRs) in one's brokerage account. May 17 at 2:27
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I got an interesting answer from US CPA taxingtimes on Reddit: that's because the amount of foreign tax credit one may claim depends on the tax treaty between the United States and the country where one received the foreign tax.

Details from taxingtimes:

Perhaps because withholding at source is different than what you are eligible to claim a tax credit for.

Let’s say you own shares of a dividend in Switzerland and they distribute Swiss earnings. Default withholding is 35% but there is a tax treaty that says they are only entitled to 15%. You have to work with the country/depositary/whomever to get the treaty rate.

When you claim a foreign tax credit you are only entitled to claim up to the treaty rate. So if you didn’t jump through hoops (or have someone do it on your behalf) they would have withheld 35% but you are only eligible to claim a tax credit for 15% regardless of what you actually paid. Reporting the amount earned from each country and the amount being claimed as a credit for each country helps provide information to the IRS about whether taxpayers are abiding by the requirement to limit their claim for credit to the treaty rate.

As a result, Turbotax asks users to break down the foreign taxes by the country where they occurred:

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    Re "Turbotax asks users to break down the foreign taxes...", perhaps this is a problem with TurboTax? The IRS's Free Fillable Forms, which I've used for the past several years, does not.
    – jamesqf
    May 17 at 2:28
  • @jamesqf thanks that's good to know I wonder about this as well. May 17 at 2:29

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