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How to report 1099-DIV ADR fees

 
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12 Replies
Aircarl1
New Member

How to report 1099-DIV ADR fees

It appears to me that most people will lose the use of this fee on their tax returns (because of the 2% limitation).  Why not keep track of it and when you sell the ADR adjust the purchase price to take into account all the fees you paid.
DianeW
Expert Alumni

How to report 1099-DIV ADR fees

@Aircarl  Investment expenses are not expenses of sale and therefore this doesn't allow for this option.
Aircarl1
New Member

How to report 1099-DIV ADR fees

According to some IRS publications "The basis of stock must be adjusted for certain events that occur after purchase".
DianeW
Expert Alumni

How to report 1099-DIV ADR fees

They are a possible deduction for you.

These are investment expenses deducted on Schedule A (Itemized Deductions).  If you take the standard deduction then you don't really get to deduct them.  Also, only the amount of investment expenses in excess of 2% of AGI actually get included in the itemized deductions total.  So most people don't even bother to enter these sort of expenses unless it's a really significant amount.

  • Enter them under the   Deductions & Credits > Retirement and Investments > Other Investment Expenses 

rv2
Level 3

How to report 1099-DIV ADR fees

is this in ref to 2018 taxes?
My understanding is that these expenses are no longer tax deductible for federal purposes from 2018 onwards. Appreciate a confirmation. 

How to report 1099-DIV ADR fees

"The Tax Cuts and Jobs Act eliminated the deduction for investment expenses, starting in 2018. Fees for investment costs were deductible as a miscellaneous itemized deduction, to the extent they and other costs exceeded 2 percent of your adjusted gross income." [CNBC news article]

So, as you state, the former answer no longer applies starting in 2018. @Cindy0H points out elsewhere that some states, like CA, may still allow such a deduction on the state return.

@Aircarl1 @rv2 One of you mentioned the possibility of deducting these expenses at the time of sale, as an increase in the basis (e.g. the costs of ownership, mainly what you paid when you bought it, but including what you paid to own it after you bought it.) This is a tantalizing prospect, but I was not able to find anyone recommending it online. Historically, these fees were deducted from the dividends that the company paid, so you never saw them, and they were essentially pre-tax expenses unless the ADR custodian AND your broker caught them and then added them to your taxable dividends. However, starting in 2009 the SEC allowed the ADR (American Depositary Receipts--not sure why there's an "a" in Depositary, but the SEC has it) custodian bank to directly pass through these fees, up to once a year. As time has proceeded this has become the new standard practice. If the ADR/underlying foreign stock pays a dividend, you will likely see this fee once a year in association with one of the dividends. The ADR custodian is also collecting and remitting foreign taxes, which are a deductible expense as foreign taxes paid, and you can find these by searching online for the stock symbol and "ADR", like "TSM ADR fee".

RECOMMENDATIONS

1) Ignore it. Assuming you bought a substantially priced stock ADR, a couple pennies per share each year is negligible. (GSK cost me .002% in ADR fee this year.)

2) Don't buy foreign stocks directly. The ADR custodian is actually giving you a good deal :-). 

3) Don't own ADRs in a retirement account if you can own them in a taxable account just as easily, as foreign taxes are only deductible as a credit against US taxes owed, and you won't have US taxes to deduct them against.

How to report 1099-DIV ADR fees

This was totally true not so long before the post, but the rules changed starting with taxes for 2018! @DianeW I've added some discussion below.

How to report 1099-DIV ADR fees

Spino,

You appear very knowledgeable about ADRs.  I have a question that is related to what you have written.  I own ADRs in my UK-based company.  When dividends are reported, I receive a statement indicating that, for example, the total "gross" dividend is worth $1,000 and that the processor's fee is $15, making my "net" dividend $985.  When the processor reports the dividend income on which I should pay US income taxes, they report at the "gross" dividend level of $1,000.  This seems wrong to me since I never received $1,000, but instead only the "net dividend" of $985.  I'm not sure why I should pay taxes on the processor's fees.  In your experience, what is the proper dividend income on which I should be paying taxes?  Thank you for your perspective!

Paul

DaveF1006
Employee Tax Expert

How to report 1099-DIV ADR fees

The processor fee is like a broker fee that is not tax deductible as an investment fee. Strictly speaking, you do need to report the net proceed at $985.

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How to report 1099-DIV ADR fees

Hello, @iamquizzical You ask a very good question. I think I have to agree with the expert reply, except that you need to declare the whole dividend, not the net dividend as income. (I think that was just an editing error.) But let's talk a little bit about why....

The dividends are being reported as passive income, so you don't have to pay wage taxes or self-employment taxes, which is why the investment expenses used to be deductible on schedule A, not directly against the income itself. Further, if you held the investment long enough, you get the lower capital gains tax rate on it (0, 15%, or 15% plus the net investment income tax.) So, from the tax writer's perspective you're getting a good deal already. Further, you're in the category of people who are taking advantage of investing to reap an income and so you are not particularly to be pitied and therefore entitled to special relief either.

So when they "gave" a bunch of tax relief in the tax cut bill, they took this one away altogether. Before it was limited various ways and therefore not a general above the line deduction anyway.

On a practical basis, these ADR fees are basically custodial fees, and now that we know about them we should take them into account when evaluating foreign domiciled investments, including the fact that they will not be deductible expenses any more than fees for personal financial planning, legal expenses, and meals at chicken restaurants. Still, I used to invest when I had to pay commissions, and I can take these fees in stride as well :-). It's just a little disappointing when I don't know it's coming, but life is like that.

You could avoid it if you were in the business of buying and selling, rather than holding for investment purposes, but then you'd be paying other taxes, and governments do get the right both to tax us and to change their mind from time to time about how to tax us.

How to report 1099-DIV ADR fees

Unfortunately ADR fees are not tax deductible for most holders. As the name implies it is not a tax like the dividend withholding tax. So it is not tax deductible.

How to report 1099-DIV ADR fees

Thank you very much Spino (and everyone else who replied) for your detailed explanation.  I am now reconciled to owing income tax on the gross dividend amount even though I only received the net dividend.  In addition to your excellent explanation, I found the following regarding this situation in IRS Publication 550:

Dividends Used To Buy More Stock

 

The corporation in which you own stock may have a dividend reinvestment plan. This plan lets you choose to use your dividends to buy (through an agent) more shares of stock in the corporation instead of receiving the dividends in cash. Most mutual funds also permit shareholders to automatically reinvest distributions in more shares in the fund, instead of receiving cash. If you use your dividends to buy more stock at a price equal to its fair market value, you must still report the dividends as income.

If you are a member of a dividend reinvestment plan that lets you buy more stock at a price less than its fair market value, you must report as dividend income the fair market value of the additional stock on the dividend payment date.

You also must report as dividend income any service charge subtracted from your cash dividends before the dividends are used to buy the additional stock. But you may be able to deduct the service charge.

In some dividend reinvestment plans, you can invest more cash to buy shares of stock at a price less than fair market value. If you choose to do this, you must report as dividend income the difference between the cash you invest and the fair market value of the stock you buy. When figuring this amount, use the fair market value of the stock on the dividend payment date.

I still think this tax treatment is illogical and inconsistent - for example, if I receive $100 in interest income from a bank CD, the bank doesn't say "if we didn't have operating expenses, we could have paid you $110 in interest, so report your interest income as $110."  However, I understand tax law is not always logical.  Thank you again!

Paul

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