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How to trim tax on foreign dividends

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in Small Business Tax

Q: I'm investing in dividend-paying stocks in a foreign country. Because of withholding by the government, the dividends are substantially reduced. Do I have to pay tax on the full amount of the dividends? W.L., Braintree, Mass.

A: Typically, you must report all dividend income received from foreign corporations. But you can offset your tax liability with a foreign tax credit or a miscellaneous itemized deduction. Claim the credit by filing Form 1116 or take a miscellaneous deduction on Schedule A of Form 1040. It's usually preferable to claim the credit. Note: Because of new lower tax rates on dividends, you must make certain adjustments when reporting dividend income from foreign corporations. The rules will be similar to reflecting the tax differential on capital gains.

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