Hi
I'm a US citizen living abroad and I've recently opened a brokerage account here. The brokerage firm had me fill out a W-9, but they still withhold 15% tax on US dividends, as though I'm not a US citizen (15% is the treaty rate between the US and the country I reside in). We've emailed back and forth about 50 times, but I can't seem to get anywhere with them. Instead of going through them, is it possible to reclaim the withheld amount on my US taxes? I haven't filed taxes before because this is the first year I make enough to need to file (I'm young), so I'm not sure how all of this works.
Just to get it out of the way: opening a US brokerage account isn't an option for various reasons, contacting a different broker isn't an option at this point (I don't have enough $ for pretty much any other place), I presume I won't ever live in the US and non-US funds aren't an option.
Thank you
Foreign brokerage & US withholding taxes for US citizen
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- Location: UK
Re: Foreign brokerage & US withholding taxes for US citizen
Welcome.
The broker should provide you with a form 1099-DIV showing the 15% as federal tax withheld (box 4). If you then file some flavo(u)r of 1040 and attach this as evidence of tax withholding it should all balance out. In the extreme case you'd get all of it refunded by the IRS, for example where your earnings fall below the FEIE and you have no other non-earnings income.
That's the theory. In practice some non-US brokers appear to be less than familiar with all the ridiculous complexity of IRS regulations and guidance on cross-border tax reporting and withholding -- the complexity is enormous and the guidance is weak, inadequate, and in places incorrect, so who can blame them?! -- and so might report this to you on a form 1042-S instead, which is really for non-US citizens. In that case you can still file a 1040 with the IRS to get this back, but you'll have to jump a couple of extra hurdles to get the filing right. Form 4582 is apparently your answer here. Hopefully this won't happen to you.
Finally, make sure you are fully familiar with the huge problems and restrictions that US tax rules impose on non-US residents. If you're certain that you will never want to live in the US in future, and have or can acquire another citizenship, then renouncing your US citizenship would be one way to remove yourself from these restrictions.
In particular, as a US citizen you need to watch out for the PFIC tax trap. This can completely destroy your entire savings and retirement plans. Given that you're paying a 15% US tax withholding here it sounds like you've perhaps already seen this and navigated around it, but if not then you'll want to take care not to run into it in future.
The broker should provide you with a form 1099-DIV showing the 15% as federal tax withheld (box 4). If you then file some flavo(u)r of 1040 and attach this as evidence of tax withholding it should all balance out. In the extreme case you'd get all of it refunded by the IRS, for example where your earnings fall below the FEIE and you have no other non-earnings income.
That's the theory. In practice some non-US brokers appear to be less than familiar with all the ridiculous complexity of IRS regulations and guidance on cross-border tax reporting and withholding -- the complexity is enormous and the guidance is weak, inadequate, and in places incorrect, so who can blame them?! -- and so might report this to you on a form 1042-S instead, which is really for non-US citizens. In that case you can still file a 1040 with the IRS to get this back, but you'll have to jump a couple of extra hurdles to get the filing right. Form 4582 is apparently your answer here. Hopefully this won't happen to you.
Finally, make sure you are fully familiar with the huge problems and restrictions that US tax rules impose on non-US residents. If you're certain that you will never want to live in the US in future, and have or can acquire another citizenship, then renouncing your US citizenship would be one way to remove yourself from these restrictions.
In particular, as a US citizen you need to watch out for the PFIC tax trap. This can completely destroy your entire savings and retirement plans. Given that you're paying a 15% US tax withholding here it sounds like you've perhaps already seen this and navigated around it, but if not then you'll want to take care not to run into it in future.
Last edited by TedSwippet on Thu Feb 08, 2018 6:05 am, edited 1 time in total.
Re: Foreign brokerage & US withholding taxes for US citizen
I contacted my broker again and they said that FACTA doesn't require them to provide me with a 1099-DIV or any other US tax documents. They do however send an annual statement detailing all my trades, dividends, taxes withheld, etc. All customers receive this, i.e. not only US customers, and isn't in english. Any idea of this "will do"?
I don't want to deal with PFIC issues, so I'm taking steps to avoid that. It's interesting though, I talked to an accountant that runs a small business only doing tax returns for expats/US citizens abroad, who said that PFIC issues are way overblown by most people. They're a hassle and it will cost you a little more to prepare your tax papers, but by overwhelming odds won't have any negative tax consequences. Just to be clear, I am not well versed on the topic. I'm just restating what she said.
Renouncing has been on my mind, but I don't want to make such a big decision at my age. Who knows what and where I am in 10-20 years. Had I been 50 years old with a set career and my path was pretty clear, things would be different.
Thanks
I don't want to deal with PFIC issues, so I'm taking steps to avoid that. It's interesting though, I talked to an accountant that runs a small business only doing tax returns for expats/US citizens abroad, who said that PFIC issues are way overblown by most people. They're a hassle and it will cost you a little more to prepare your tax papers, but by overwhelming odds won't have any negative tax consequences. Just to be clear, I am not well versed on the topic. I'm just restating what she said.
Renouncing has been on my mind, but I don't want to make such a big decision at my age. Who knows what and where I am in 10-20 years. Had I been 50 years old with a set career and my path was pretty clear, things would be different.
Thanks
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- Posts: 5166
- Joined: Mon Jun 04, 2007 4:19 pm
- Location: UK
Re: Foreign brokerage & US withholding taxes for US citizen
I suspect not, particularly if not in English. The IRS generally only accepts its own reporting forms -- 1099, 1042-S, and so on -- as proof of tax paid in US withholding, because only then can they match them up later with the copies that the brokerage or bank sent the IRS directly themselves.Mr.Bowtie wrote:I contacted my broker again and they said that FACTA doesn't require them to provide me with a 1099-DIV or any other US tax documents. They do however send an annual statement detailing all my trades, dividends, taxes withheld, etc. All customers receive this, i.e. not only US customers, and isn't in english. Any idea of this "will do"?
The IRS appears to be sticky on this point too. Last year they initially rejected my claim for credit for a whole $2 of US tax withheld, because my 1040NR return did not have the appropriate 1042-S attached to it. To recover that $2 I had to fax them a copy of the 1042-S when it finally arrived. (Yes, fax. Apparently most of the IRS still lives in the previous century.)
If your broker is withholding US federal taxes then they are either a US based broker or a 'qualified intermediary'. Either way they should provide the right reporting forms for W-9 certified customers. If they don't then all I can suggest is that you change broker to one that does. Be warned, though, that this may be easier said than done. Because of FATCA a reasonable number of non-US banks and brokers now refuse service to US citizens, as they can be too expensive and too risky to keep on the books.
Pretty well every reliable source disagrees with what you say your accountant told you. For example, this article from Thun Financial:Mr.Bowtie wrote:I don't want to deal with PFIC issues, so I'm taking steps to avoid that. It's interesting though, I talked to an accountant that runs a small business only doing tax returns for expats/US citizens abroad, who said that PFIC issues are way overblown by most people. They're a hassle and it will cost you a little more to prepare your tax papers, but by overwhelming odds won't have any negative tax consequences. Just to be clear, I am not well versed on the topic. I'm just restating what she said.
Why Americans Should Never Own Shares in a Non-US Mutual Fund (PFIC)
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For example, an American holder of a U.S. incorporated mutual fund invested in European stocks pays the low long-term capital gains rate of 15% if the fund is held for more than one year. The same American investor who buys a nearly identical fund listed in the UK or in Switzerland (or any place outside the US) will find their investment subject to the PFIC taxation regime, which counts all income (including capital gains) as ordinary income and automatically taxes it at the top individual tax rate (39.6%). In some cases, the total tax on a PFIC investment may rise to well above 50%. Furthermore, capital losses cannot be carried forward or used to offset other capital gains.
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As a result of the 2010 FATCA law, form 8621 must be filed every year for separate PFIC (previously 8621 only had to be filed in years of when the fund paid distributions to the fund holders). It does not take long to realize that filing form 8621 for three to four PFIC investments (or more) might quickly run up a tax preparation bill to many thousands of dollars, no matter how much (or little) the underlying investments are worth or how well they have performed.
Re: Foreign brokerage & US withholding taxes for US citizen
Great news, they've agreed to not withhold taxes on US sourced income. I emailed the country manager and he sorted things out. The customer service rep I've been going back and forth with is pretty upset
One more question. I assume I'll need to use foreign tax credits at some point. My brokerage won't send me a list of how much is withheld at the fund level, i.e. a typical international fund will have 6-7% withheld in total of the dividend. Do I need the brokerage to send me documentation for this, or can I print something out from Vanguards tax center, like:
https://advisors.vanguard.com/VGApp/iip ... tkIndx2016
Thank you for the help
One more question. I assume I'll need to use foreign tax credits at some point. My brokerage won't send me a list of how much is withheld at the fund level, i.e. a typical international fund will have 6-7% withheld in total of the dividend. Do I need the brokerage to send me documentation for this, or can I print something out from Vanguards tax center, like:
https://advisors.vanguard.com/VGApp/iip ... tkIndx2016
Thank you for the help