Not US person, living abroad, US div income (funds), no tax withheld. Entering income from 1099-DIV in schedule NEC. Can I get a credit for foreign tax (1099-DIV box 7)?

[bander]

Situation: I am not a US person, I'm living abroad, I had US dividend income from mutual funds in 2020, but tax wasn't withheld since I haven't submitted W8BEN yet.
I received 1099-DIV. I know that I need to enter the income in schedule NEC of form 1040NR, and I know the tax rate from the tax treaty.
My question: form 1099-DIV shows that foreign tax of more than $300 was withheld. Can I get a foreign tax credit or deduction? If so, in which form do I enter this?
Thank you.

[pk]

@bander , if I understand you correctly -- 1. You are NOT US citizen/Resident ( Green Card);  2. You do not  live in the USA  or its territories and 3. you have some US sourced income reported on form 1099- DIV  ( probably including Mutual Funds ) from US brokerage.

(A)  you are correct that you have to file  your US return on form 1040-NR recognizing  US sourced  income

(B)  the "foreign  taxes" paid  by the Mutual Fund does not enter into the US return because  that income  is foreign ONLY for US person and  the same goes for the  foreign  taxes paid;

(C)  you will have to recognize the  "foreign source" income and the  "foreign taxes" paid  when  you file  tax return for  your home country  and under the rules of any  treaties that may exist between your country  and those countries involved.  Not that your country  may also require you to recognize the  US sourced income and the taxes paid to USA on that return.  Thus it is advisable that you prepare the US return first,  and then prepare the return for your  own country.

Does this make sense ?

[investng engineer]

I doubt you have set up your brokerage account properly. You should have received 1042-S, not 1099-DIV. On 1042-S, there's no foreign tax paid box, and dividends from US corporations (taxable by the US government) are shown. It does not matter if you have filed W8BEN or not; if the broker didn't receive W8BEN from you and the broker knew you are not a US person, you should have been withheld at 30% rate, NOT zero. (See W8 instructions "presumption rules") Submitting W8BEN helps set withholding rate to a correct rate and saves you from asking IRS for a refund.

If I were you, I would contact the broker immediately to correct your status on file.

For the foreign tax paid question, that's likely a question for your home country/state, because the US generally doesn't tax non-residents on those income. (More accurately, the US doesn't tax dividends that are not "U.S. source income". See IRS Pub 519 "Dividends" section .)

Answers are correct to the best of my knowledge when posted, but should not be considered to be legal or tax advice.

[investng engineer]

I doubt you have set up your brokerage account properly. You should have received 1042-S, not 1099-DIV. On 1042-S, there's no foreign tax paid box, and dividends from US corporations (taxable by the US government) are shown. It does not matter if you have filed W8BEN or not; if the broker didn't receive W8BEN from you and the broker knew you are not a US person, you should have been withheld at 30% rate, NOT zero. (See W8 instructions "presumption rules") Submitting W8BEN helps set withholding rate to a correct rate and saves you from asking IRS for a refund.

If I were you, I would contact the broker immediately to correct your status on file.

For the foreign tax paid question, that's likely a question for your home country/state, because the US generally doesn't tax non-residents on those income. (More accurately, the US doesn't tax dividends that are not "U.S. source income." See IRS Pub 519 "Dividends" section.)

Answers are correct to the best of my knowledge when posted, but should not be considered to be legal or tax advice.

[bander]

@pk, Thank you for your answer.

Yes, I am reporting the US income and taxes on my home country tax return, and I am familiar with the tax treaty between the countries. My question was only regarding the US tax return. You are suggesting that while I enter the dividends paid (from 1099-DIV), on 1040NR Schedule NEC, I should not enter the foreign tax paid (also from 1099-DIV) anywhere in my US return. That answers my question.

You wrote: "you will have to recognize the "foreign source" income and the "foreign taxes" paid when you file tax return for your home country and under the rules of any treaties that may exist between your country and those countries involved." The problem is that the foreign tax paid, listed on 1099-DIV box 7, does not detail "those countries involved", i.e., does not list to which countries the tax was paid (as far as I can see). Anyway, that is a separate issue, pertaining to my home country tax return.

[investng engineer]

I think you should have received 1042-S, not 1099-DIV. Your broker has probably got your residency status incorrect. On 1042-S, there's no foreign tax paid box, and dividends from US corporations (taxable by the US government) are shown. It does not matter if you have filed W8BEN or not; if the broker didn't receive W8BEN from you and the broker knew you are not a US person, you should have been withheld at 30% rate, NOT zero. (See W8 instructions "presumption rules") Submitting W8BEN helps set withholding rate to a lower correct rate and saves you from asking IRS for a refund.

If I were you, I would contact the broker immediately to correct your status on file.

For the foreign tax paid question, that's likely a question for your home country/state, because the US generally doesn't tax non-residents on those income. (More accurately, the US doesn't tax dividends that are not "U.S. source income." See IRS Pub 519 "Dividends" section. Therefore, there's no foreign tax credit because there's no US tax to begin with.)

Answers are correct to the best of my knowledge when posted, but should not be considered to be legal or tax advice.

[bander]

@investng engineer, Thanks for your answer.

The W8BEN is indeed a separate matter: it only affects withholding, not how much tax I need to pay to the IRS.

As far as I know, the dividends reported either in 1099-DIV or in 1042-S are all US sourced income (since they originate in US-domiciled mutual funds), and therefore are taxed by the US. In my case they are considered "not effectively connected income". As such they are reported on Schedule NEC, and the tax rate is according to the tax treaty between the two countries.

Per my understanding, the foreign tax is paid/withheld directly at the mutual fund level, and not by the broker, so it is already deducted whether I receive 1099-DIV or 1042-S, and whether there is broker withholding due to W8BEN or not.

Given that tax on the dividends, which are all US sourced income, is owed to the IRS in any case, I was wondering in my original question if the foreign tax that was already paid can be used to offset somewhat the US tax owed.

[pk]

@bander , agreeing with @investng engineer  that you should have received  1042  rather than a 1099 and also agreeing with your commentary on the subject, lets clarify :

(a)  Mutual funds or similar with "foreign" earnings   ( i.e. foreign  from the perspective  of a US investor / entity) reports those  foreign sourced earnings ( for US taxes ) and "foreign " taxes  paid thereon.  Such "foreign" earnings  are generally reported as percentage i.e.  the fund has x% of its total investment  in country  x and so on and so forth.  Similarly  x% of the total foreign taxes paid  has been paid  to country x.  Details  of these  are  generally available  in the back pages  of consolidated  brokers statement or directly from the  broker/ manager of the fund.

(b) a US person owning such funds  is taxed by the US  on both the US sourced  income and  on the foreign sourced income ( world income )  and given credit for  foreign taxes paid  on the foreign income.    A Non US person is taxed by the US  ONLY on US sourced / connected  income --- he/she is not taxed by the US on the foreign  portion of the total income nor given credit for the taxes paid to a foreign  country. -- therefore the need for the  1042-S

(c) a Non-US person has the additional burden of the existing  tax treaties between US and  his/her home country and the  those between the home country and the  "foreign " incomes  & taxes paid  thereon.  It is quite complicated ( in general).

Does this make sense and/or do you need more help ?

pk

[investng engineer]

Pub 519 says:

Foreign tax credit.

If you receive foreign source income that is effectively connected with a trade or business in the United States, you can claim a credit for any income taxes paid or accrued to any foreign country or U.S. possession on that income. If you do not have foreign source income effectively connected with a U.S. trade or business, you cannot claim credits against your U.S. tax for taxes paid or accrued to a foreign country or U.S. possession.

Because you have determined that all your income is NEC (not effectively connected), there's no foreign tax credit. But your home country may offer one to combat double taxation. (Think about this: If US also allows a foreign tax credit in your situation, won't the credit be claimed twice?)

That being said, I don't think the dividend reported on 1099-DIV is US source income only, because all dividends, regardless of the source, are taxable for the US for residents. 1042-S has income code that distinguishes "Dividends paid by U.S. corporations—general" and "Dividends paid by foreign corporations". Since your income is NEC, the former one would be used for US tax return, and both may be used for your home country tax return.

I don't know whether US-based mutual funds that trade foreign stocks are considered to generate US source income only, but I would view this with a grain of salt because mutual funds are passthrough entities. At the end of the day, you may be overpaying with a 1099-DIV.

Answers are correct to the best of my knowledge when posted, but should not be considered to be legal or tax advice.

[bander]

@pk , @investng engineer,
Thank you both very much for the detailed answers. This makes total sense.