Foreign Qualified Dividends

[CB1946]

I have an ETF with both US and foreign dividends, including qualified dividends and foreign taxes paid.  The foreign dividends are reported in the supplemental information section of the tax statement provided by my broker.  However, foreign qualified dividends are reported as $0.00 in that section.  This cannot be right because of the proportion of foreign dividends to total dividends, and the amount of qualified dividends.  For example, assume total dividends are $10,000, qualified dividends are $7,000 and foreign dividends are $8,000.  No more than $2,000 of US dividends can be qualified dividends, leaving a minimum of $5,000 and a maximum of $7,000 of foreign qualified dividends.  Please correct my logic if it is wrong.

I have contacted my broker and the ETF in an effort to obtain the amount of foreign qualified dividends.  They were not able to provide it to me.  In fact, the ETF website contains a tax document that reports $0.00 in foreign qualified dividends.

Assuming that I will not be able to get the amount of foreign qualified dividends, which of the following alternatives would be the best way to report the dividends in my tax return for the purposes of determining the amount of the foreign tax credit:

1.  Assume all of the qualified dividends are foreign qualified dividends ($7,000 using the example above).

2. Pro-rate the qualified dividends based on the ratio of foreign dividends to total dividends.

     ($8,000/$10,000) x $7,000 = $5,600 (using the example above).

3. Report $0.00 of foreign qualified dividends based on the information in the supplemental section and on the website. 

4. Some other way.

I appreciate any suggestions you may have on this subject.

[DaveF1006 · Accepted solution]

It depends on your assumption of Foreign Qualified Dividends. To be considered a "Qualified Foreign Dividend" for the Foreign Tax Credit (Form 1116), the underlying foreign corporation must meet specific IRS criteria. This usually means:

1. The corporation is incorporated in a US possession, OR
2. The corporation is eligible for benefits under a comprehensive US income tax treaty, OR
3. The stock is readily tradable on an established US securities market (like an ADR).

If your ETF focuses on emerging markets or countries without tax treaties, those dividends may count as “Qualified” on your Form 1040 and get capital gains rates—but might not qualify for the adjustment on Form 1116. If the ETF sponsor reports $0.00, it usually means the underlying investments didn’t meet the “treaty-benefit” requirements for the foreign tax credit.

It may seem like you’re missing out on a tax benefit, but here’s how tax reporting works. The IRS gets the same 1099 and data that you do. If you enter anything other than $0.00 for foreign qualified dividends, your Form 1116 won’t match what your broker sends. This often leads to automatic IRS notices. Since the ETF company lists $0.00 on their website, they’ve likely already reviewed their holdings and found that none qualify for that category.

To summarize, report $0.00 of foreign qualified dividends based on the information in the supplemental section and on the website. Don't make any adjustments without a corrected supplemental disclosure statement from your broker.

[CB1946]

Thanks for your reply, and for the information on foreign qualified dividends.  

I understand that the requirements for foreign qualified dividends reported in the 1099-DIV for preferential tax rate purposes are different than the requirements for foreign qualified dividends used for foreign tax credit purposes.  

However, in the case of one ETF, more than 50% of the holdings in the fund are in countries with tax treaties (e.g. Canada, UK, Australia, Finland, France, India, Norway, Japan, Sweden, South Africa, China, Switzerland).  Only three of these are considered emerging market countries (India, South Africa and China).   If I exclude them, the holdings are still more than 50%.   It seems odd that none of the dividends are qualified for foreign tax credit purposes.

Your point about the IRS mismatch notices is well taken.  I am trying to report the correct information by confirming what the correct information is.  Unfortunately, the brokerage statement has a disclaimer regarding the information not necessarily being complete or final.  As a result, it calls into question whether a zero means zero or no information.  Also, my understanding is that the supplemental information is not reported to the IRS, possibly because it is subject to change.

Your suggestion makes sense.  I will follow it accordingly.  Thanks for your assistance.

[TexasTea]

@CB1946 can you give us any more info about the particular fund that is reporting inconsistent data?  If you don't want to identify it that's fine, but it would be easier to help if we could look at the data on their website to see if we spot something.   I have a Vanguard International ETF, VXUS, that generates mostly foreign income, and your post prompted me to do a full reconciliation of that data.  I didn't find any inconsistencies -- it showed 81.96% of the total income was foreign sourced, and 58.46% of the total income was foreign-source AND qualified.  That fit perfectly with the other reported data.   It's hard to speculate what might be different with your fund without more info.

fwiw:  here's a link to the 2025 data for Vanguard funds.  The only ones with 0% foreign qualified are bond funds:   https://investor.vanguard.com/content/dam/retail/publicsite/en/documents/taxes/ftc-2025.pdf 

[CB1946]

Thanks for your reply.  I think we figured it out.  It is probably not a reporting problem.  It is a definition problem.  The term "Foreign Qualified Dividends" has two different meanings.  One is used in the context of dividends that receive preferential tax rates.  The other is used in the context of calculating the foreign tax credit.  The criteria for foreign qualified dividends are different between the two contexts. 

Sorry for the confusion.  And thanks for your interest in resolving the problem.

[TexasTea]

@CB1946 The main reason I posted originally was because when Dave mentioned the concept of different definitions in different contexts, it piqued my curiosity about what particular characteristics of the foreign income might lead to that outcome.  I've been doing Form 1116 for about 25 years, with international tax professionals doing my returns for a good chunk of that time, and the foreign qualified dividends that are part of Box 1B of the 1099 have always been the exact same foreign qualified dividends that we used for Form 1116.    If you ever get a sense of what specifically triggers the difference with your fund's investments, it would be great if you posted back.  🙂     

[TexasTea]

@CB1946 is it a State Street fund by any chance?  They definitely have errors in the data on their website  for the qualified percentage.  (see the "ICI Tax Summary" spreadsheets near the bottom of https://www.ssga.com/us/en/individual)  For a clean example of the problem, if you look at SPDW they show 71.76% of Box 1A income is foreign, and 0% of Box 1A is qualified, therefore 71.76% of Box 1A must be non-qualified.  But it can't possibly be that high, because we know that Box 1B is 55.82% of Box 1A, which caps non-qualified at only 44.18%.  The math is broken in exactly the way your original post described.  The other big companies I looked at including Vanguard, Blackrock, ProShares and Franklin Templeton all publish non-zero values for their foreign qualified dividend percentages, even for funds that are very similar to State Street's.  So if your fund is State Street, I'd push them harder to provide correct data, otherwise you'll end up overstating your foreign source income on line 1a of your 1116, which could result in you claiming a foreign tax credit that is higher than you are entitled to.   If you aren't with State Street... um... I guess I just wasted a couple of hours trying to figure this out!

[CB1946]

Yes, I will send an update if I find out which of the requirements are not being met and causing foreign qualified dividends in the determination of the foreign tax credit to be $0.  Thanks for your continued interest in this subject.