# Foreign Interest and Dividends for US Tax Return



## BJ100

Hi everyone, 

Many thanks to all the contributors who posted very comprehensive answers to questions US expats filing US taxes - these have been invaluable as I prepare to file my first US tax return as a US expat. 

I earned foreign interest and foreign dividends (in South Africa) in 2012 and paid VAT on interest received along with income tax on dividends. I cannot for the life of me figure out how to enter both my foreign interest and foreign dividends in TurboTax and have it recognize that these have already been taxed by a foreign government. Any suggestions on how to do this via TurboTax and manually (so I can generate the relevant schedules myself if TT continues to be stubborn)? 

Thanks!

-BJ


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## Bevdeforges

Normally in almost any tax preparation program, you simply swami up a 1099 for the interest or dividends. Tell the program you want to enter a 1099 for interest or for dividends, and then just fill in the gross amounts received. (Don't do anything about the taxes paid on the 1099 forms!).

To get credit for your taxes paid, you'll have to use a form 1116 for the foreign tax credit and somewhere in the questionnaire it should ask you for your taxes paid. (I'm not all that familiar with Turbo Tax per se, but have found that many of the tax programs work in similar ways.) But you can only get a credit for income taxes paid. If you paid VAT on either interest or dividends, that's just your tough luck. Only foreign income taxes are creditable and/or deductible for US tax purposes.
Cheers,
Bev


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## BBCWatcher

Really? IRS Publication 514 says this: "In most cases, only income, war profits, and excess profits taxes (income taxes) qualify for the foreign tax credit. Foreign taxes on wages, dividends, interest, and royalties qualify for the credit in most cases. Furthermore, foreign taxes on income can qualify even though they are not imposed under an income tax law if the tax is in lieu of an income, war profits, or excess profits tax. See Taxes in Lieu of Income Taxes, later." And that subsequent section doesn't seem to include any applicable exclusion for foreign taxes on interest income.

Also, as far as I can tell South Africa doesn't even call its tax on interest a VAT. (I'm not sure where BJ100 got that.) From what I can determine, residents of South Africa are taxed on their interest income at ordinary income tax rates, although they do not have to pay tax on the first R22,800 or R33,000 of domestic interest per year (depending on age).


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## Bevdeforges

Strictly speaking, the foreign income tax credit only applies to foreign income taxes. I know nothing of the South African VAT on dividends, but if it is indeed an income tax, then I would label it as such on form 1116.

Here in France there is a special tax, collected as part of the income tax declarations, that goes for reducing the debt for the health care system. The IRS has decided that this is NOT an income tax (even though it is levied as a percentage of income), but rather a "social insurance" like social security. There are lots of "gotchas" like this, so if you claim something that is borderline, be ready to defend your action should the IRS come back and question it. (On the other hand, if it doesn't make much difference, the IRS may let it slide. It's the form of Russian Roulette we all play with the IRS every time we file.)
Cheers,
Bev


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## BJ100

Bevdeforges said:


> Strictly speaking, the foreign income tax credit only applies to foreign income taxes. I know nothing of the South African VAT on dividends, but if it is indeed an income tax, then I would label it as such on form 1116.
> 
> Here in France there is a special tax, collected as part of the income tax declarations, that goes for reducing the debt for the health care system. The IRS has decided that this is NOT an income tax (even though it is levied as a percentage of income), but rather a "social insurance" like social security. There are lots of "gotchas" like this, so if you claim something that is borderline, be ready to defend your action should the IRS come back and question it. (On the other hand, if it doesn't make much difference, the IRS may let it slide. It's the form of Russian Roulette we all play with the IRS every time we file.)
> Cheers,
> Bev


Thanks Bev, I'll err on the side of caution and not assume that the VAT on earned interest is treated as income tax by the IRS, even though it's evidently an income tax.


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## BJ100

Bevdeforges said:


> Strictly speaking, the foreign income tax credit only applies to foreign income taxes. I know nothing of the South African VAT on dividends, but if it is indeed an income tax, then I would label it as such on form 1116.
> 
> Here in France there is a special tax, collected as part of the income tax declarations, that goes for reducing the debt for the health care system. The IRS has decided that this is NOT an income tax (even though it is levied as a percentage of income), but rather a "social insurance" like social security. There are lots of "gotchas" like this, so if you claim something that is borderline, be ready to defend your action should the IRS come back and question it. (On the other hand, if it doesn't make much difference, the IRS may let it slide. It's the form of Russian Roulette we all play with the IRS every time we file.)
> Cheers,
> Bev





BBCWatcher said:


> Really? IRS Publication 514 says this: "In most cases, only income, war profits, and excess profits taxes (income taxes) qualify for the foreign tax credit. Foreign taxes on wages, dividends, interest, and royalties qualify for the credit in most cases. Furthermore, foreign taxes on income can qualify even though they are not imposed under an income tax law if the tax is in lieu of an income, war profits, or excess profits tax. See Taxes in Lieu of Income Taxes, later." And that subsequent section doesn't seem to include any applicable exclusion for foreign taxes on interest income.
> 
> Also, as far as I can tell South Africa doesn't even call its tax on interest a VAT. (I'm not sure where BJ100 got that.) From what I can determine, residents of South Africa are taxed on their interest income at ordinary income tax rates, although they do not have to pay tax on the first R22,800 or R33,000 of domestic interest per year (depending on age).


Hi BBCWatcher,

I have a cash account for which the organization breaks out fees charged and VAT on those fees. Instead of just reporting accrued net interest, which is what most banks do, they calculate gross interest and back out fees and VAT on those fees to show the net interest line. The VAT seems to me a tax on my interest income but I won't treat it as such just in case the IRS disagrees.

Dividends - my brokerage account has deducted a dividend withholding tax from each SA dividend payment I've received so far. I do want to make sure I get credit for any dividend taxes I've paid in SA. 

Thanks, 

BJ


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## BBCWatcher

Are you talking about bank fees, like a fee to use an ATM card at another bank's machine, a fee for a bounced check, etc? Yes, some countries charge VAT, GST, sales tax, etc. on bank fees, brokerage fees and commissions, etc. Those taxes on fees are generally not income taxes.

But taxes on the interest you've received generally are income taxes. What could be going on is that South Africa is applying taxes to the interest you've received after subtracting the VAT you've paid on bank fees. If that's what's going on, the VAT portion would not be eligible for the FTC but the income tax you've paid beyond that (if any) would be.

And there's nothing aggressive about any of this, as long as you calculate it correctly.

If I'm off in the wrong direction in terms of understanding your account please advise, but there are lots of countries and bank accounts like what I've just described.


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