Why Foreign Dividends Get Taxed Twice
When you hold stocks from a foreign country, that country typically withholds tax on your dividend before it ever reaches your brokerage account. But because the U.S. taxes its residents on worldwide income, that same dividend is also subject to U.S. tax. To prevent double taxation, the IRS allows a Foreign Tax Credit (FTC) that offsets your U.S. tax liability on that same foreign-source income. The catch is that the credit isn't unlimited — it's capped at whatever your U.S. tax on that income would have been. If the foreign withholding rate is higher than your U.S. rate, you generally can't recover the excess that year, though it may be carried back one year or forward up to ten.
How the Calculation Works
| Step | Item | Formula |
|---|---|---|
| 1 | Foreign Tax | Dividend × Foreign Withholding Rate |
| 2 | U.S. Tax | Dividend × Your U.S. Tax Rate |
| 3 | Credit Limit | Lesser of the two amounts |
| 4 | Extra Tax / Excess | If U.S. tax is higher, pay the difference; if foreign is higher, excess isn't credited |
This calculator is a simplified estimate for a single dividend. Your actual Form 1116 calculation combines all foreign-source income together and applies additional limitation rules, and carryback/carryforward provisions can change your final result. Confirm your exact credit with a tax professional or IRS Form 1116 instructions.
Frequently Asked Questions
The source country withholds tax first, and the U.S. also taxes worldwide income — the Foreign Tax Credit relieves this overlap.
No, the credit is capped at your U.S. tax on that income. Excess amounts may carry back one year or forward ten.
Many U.S. tax treaties set 15% on portfolio dividends, but check your broker's statement for the exact rate applied.
※ This is a simplified single-dividend estimate. Actual Form 1116 results depend on total foreign income and carryover rules.