You opened your brokerage statement and saw a dividend payment from a foreign company (like Samsung, TSMC, or LVMH).
But wait. The amount is smaller than expected.
You check the details: "Foreign Tax Withheld: $150."
The foreign government took their cut. Now, when you file your US taxes, the IRS wants to tax that same dividend income again.
This is called Double Taxation.
Fortunately, you don't have to accept it. The IRS allows you to claim a Foreign Tax Credit (FTC) to wipe out your US tax bill dollar-for-dollar.
Disclaimer: Tax treaties vary by country (e.g., Taiwan vs. Korea). This guide is for educational purposes. Consult a CPA for Form 1116 filing.
How to Claim the 'Foreign Tax Credit' and Force the IRS to Pay You Back
1. Credit vs. Deduction: The Million Dollar Difference
Most people make the mistake of taking a "Deduction." Smart investors take the "Credit."
| Option | How It Works | Value (Example: $100 Foreign Tax) |
|---|---|---|
| Deduction | Reduces your taxable income. | Saves you approx $22-$24 (at 22-24% bracket). |
| Credit (FTC) | Reduces your tax bill directly. | Saves you $100 (Dollar-for-Dollar). |
Verdict: Always choose the Credit unless you have zero US tax liability.
2. The "Easy Route" (Under $300/$600)
Good news for small investors.
If your total foreign taxes paid (Box 7 on 1099-DIV) are:
- Under $300 (Single filers)
- Under $600 (Married Filing Jointly)
You can skip the complicated paperwork!
You do NOT need to file Form 1116. You simply enter the amount on Schedule 3 of your Form 1040, and the IRS subtracts it from your bill.
3. The "Form 1116" Route (Over $600)
If you paid more than the $300/$600 limit, you must file Form 1116.
This form calculates a "Limit" to ensure you don't claim more credit than the US tax rate would allow.
⚠️ The "High Tax Country" Trap (TSMC Example)
Some countries tax you higher than the US rate.
Example (Taiwan/TSMC): Taiwan withholds 21%. If your US tax rate on dividends is only 15%, the IRS will limit your credit to 15%.
The Solution: You can carry over the unused portion (the extra 6%) to future years (up to 10 years). Don't just throw it away!
4. Watch Out for "Qualified Dividends" Adjustment
Here is where DIY filers get audited.
If your foreign dividends are "Qualified" (taxed at the lower 0%, 15%, or 20% rate), the IRS requires you to reduce your foreign tax credit claim proportionally.
- Why? Since you are paying less US tax on that income, the IRS won't give you a full credit for the foreign tax.
- The Risk: If you manually claim the full amount without doing the "Adjustment Calculation," you will likely receive a correction notice (CP2000).
- Recommendation: Use tax software (TurboTax Premier/H&R Block) that handles "Form 1116 AMT/Adjustment" automatically.
5. What About Retirement Accounts?
Bad News: You generally cannot claim the Foreign Tax Credit for foreign stocks held in an IRA, Roth IRA, or 401(k).
Why? Because these accounts are tax-deferred or tax-free, you aren't paying US annual income tax on them, so there is no "double taxation" to fix. The foreign tax is just lost money.
Strategy:
Hold US stocks/ETFs in your IRA.
Hold International Stocks (VXUS, TSMC, Samsung) in your Taxable Brokerage Account to unlock the credit.
Stop Leaving Money on the Table
The IRS is not a charity, but neither are foreign governments. You shouldn't have to pay both of them for the same dollar earned.
Look at your 1099-DIV Box 7 today.
If there is a number there, make sure you get every cent back when you file by April 15th.
Helpful Resources:
IRS Form 1116 Instructions
TurboTax: Guide to Foreign Tax Credit
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