Here is a current breakdown of international dividend tax rates by country:
Australia 30%
Austria 25%
Bangladesh 15%
Belgium 25%
Bosnia 5%
Brazil 15%
Bulgaria 15%
Canada 15%
Chile 35%
China 10%
Czech Republic 15%
Denmark 28%
Finland 28%
France 25%
Germany 26.40%
Greece 10%
Hungary 10%
Iceland 15%
Indonesia 20%
Ireland 20%
Israel 20%
Italy 27%
Japan 10%
Kazakhstan 15%
Kenya 10%
Kuwait 15%
Latvia 10%
Lebanon 10%
Lithuania 15%
Luxembourg 15%
Macedonia 10%
Malaysia 25%
Malta 35%
Mexico 10%
Morocco 10%
The Netherlands 15%
New Zealand 30%
Nigeria 10%
Norway 25%
Pakistan 10%
Peru 4.10%
Philippines 30%
Poland 19%
Portugal 20%
Romania 16%
Russia 15%
Saudi Arabia 5%
Serbia 20%
Slovenia 20%
South Korea 27.50%
Spain 19%
Sri Lanka 10%
Sweden 30%
Switzerland 35%
Taiwan 20%
Thailand 10%
Turkey 15%
United Kingdom (REITs only) 20%
Ukraine 15%
Fortunately, there may be a way to recoup some or all of the taxes collected on your dividend payments by foreign credits. The U.S. tax code includes a credit for tax payments made to foreign governments, simply known as the foreign tax credit. The purpose of this credit is to avoid double taxation of income by two separate companies. In other words, the IRS doesn’t want to tax you on dividend income that you’ve already been taxed on by a foreign government. Note that there are limitations to the amount of foreign‑tax payments you can take as a credit, so you may not be able to receive a credit for 100% of the tax that you paid to a foreign government. Regulations regarding the foreign tax credit are complex, so check with a qualified financial professional if you plan to take the foreign tax credit. You can learn more about the foreign tax credit at https://www.irs.gov/individuals/international-taxpayers/foreign-tax-credit-how-to-figure-the-credit.
Other than tax considerations, you should also consider currency risks, political risks, and regulatory risks before investing in foreign dividend stocks. Acts of terrorism, war, civil unrest, natural disasters, and other calamities can significantly change the economic outlook of a country and the companies that operate within its borders. A foreign government could also impose new taxes on dividend payments, or the companies you invest in may be nationalized by a country’s government. Significant changes in currency values could also affect the value of your foreign stocks if they are not priced in U.S. dollars. Because of these risks, I tend to only invest in companies that are located in countries that have well established and stable governments, like the United Kingdom and Canada.
Another important consideration regarding investing in international dividend stocks is that they often do not mirror the monthly or quarterly payment schedules that are common in U.S. dividend stocks. For example, National Grid Plc (NGG) only pays out dividends twice per year and its May dividend is often twice as much as its November dividend. Some foreign stocks will also vary the amount of their dividend based on the company’s actual profits, so make sure to research the company’s dividend payment history using MarketBeat’s company profiles or another resource to verify a foreign company’s frequency of dividend payments and consistency of dividend amounts.
If you are considering buying a foreign dividend stock and want to place a trade, you may find out that you aren’t able to place trades on many exchanges outside the United States in your brokerage account. Fortunately, many large foreign companies trade as American Depository Receipts (ADRs) on the New York Stock Exchange, the NASDAQ, and other U.S. exchanges. ADRs are tradable certificates of ownership representing a certain number of shares of a foreign stock issued by a U.S. bank. ADRs are bought and sold like regular shares and are denominated in U.S. currency. They also pay out dividends just like owning the actual shares of a stock would. ADRs effectively provide a very easy way for individual investors in the United States to buy shares of large foreign companies throughout the world.
Taxation of Real‑Estate Investment Trusts
As we learned earlier, real‑estate investment trusts (REITs) are a special type of corporate entity used for commercial real‑estate projects that can avoid paying corporate taxes at the federal level. Because REITs are not set up as a typical C‑corporation like most publicly traded companies are, they have special requirements under the tax code. REITs have the same accounting and valuations that corporations do, but instead of distributing profits to shareholders, they distribute cash flow. In fact, the IRS requires REITs to pay out 90% of their income to shareholders as distributions, which means they will generally have higher dividend yields than the common market and they will have very high payout ratios.
When a REIT meets the 90% payout requirement, it is generally exempted from paying corporate taxes at the federal level. Because of this tax provision, distributions from REITs are not considered qualified dividends and are taxed at a shareholder’s ordinary income rates. A portion of a REITs distribution may also be considered a non‑taxable return of capital, which reduces a shareholder’s taxable income in the year it is received and defers payment of taxes on that portion of the investor’s shares until they are sold. These payments will also reduce the shareholder’s cost basis in the stock. REITs also may pay out some qualified dividends in a few special cases, but generally speaking, most distributions from REITs will be taxed at a shareholder’s ordinary tax rate.
The tax treatment of REIT distributions can make them less attractive to investors in high tax brackets. If you are in the top tax bracket, you will pay your ordinary tax rate of 39.6% plus the net investment income tax of 3.8% on any distributions you receive from a REIT. This turns a 5% dividend yield before tax into 2.83% dividend yield after tax. Ouch. When possible, hold your REIT investments in a non‑taxable or tax‑advantaged investment account, such as an IRA or a 401K, to avoid paying ordinary income taxes on REITs. If this isn’t an option for you, just make sure you are considering what after‑tax dividend yield you will receive when comparing REITs to other dividend stocks.
Taxation of Master Limited Partnerships (MLPs)
Master limited partnerships (MLPs) are a special type of corporate entity that is a combination of a partnership and a publicly traded company. They are primarily used as corporate vehicles for energy and utilities companies. Since MLPs are pass‑through entities, their income is only taxed at the level of the partners in the MLP and is generally not subject to corporate taxes at the federal level. Distributions from MLPs are not subject to tax when they are received by a shareholder. Instead, MLP distributions simply reduce the investor’s cost basis in the MLP, which effectively defers all tax payments on distributions until the investor sells their shares in the MLP.
While MLPs offer significant tax benefits to investors, there are two caveats to be aware of. First, you should not invest in an MLP through an IRA or other tax‑deferred account. Income from an MLP is not tax‑deferred if shares are held in an IRA, which eliminates the tax benefits of investing in MLPs. Second, investing in MLPs may make filing your taxes each year slightly more complicated.
Instead of receiving a 1099 form at the end of the year, you will receive a K‑1 form as you would with any other business partnership. This is really on
ly an issue if you do your own taxes, as any qualified tax professional will know how to include the numbers from a K‑1 form on your return.
Taxation of Preferred Stocks
Preferred stocks are a special class of shares in a company that pay a fixed dividend yield like a bond does. The tax treatment of dividends paid by preferred stocks can vary from security to security.
Some preferred stocks will pay out qualified dividends just as any other publicly traded company. Dividend payments issued by trust‑preferred securities are not qualified dividends because they are essentially interest payments. Preferred‑stock dividends issued by business development companies (BDCs) are also not qualified distributions.
Make sure to read the investment prospectus for the preferred‑stock issue if you are considering investing in a preferred stock. The preferred‑stock issue’s prospectus will explain the tax treatment of the stock along with other important investment information.
Taxation of Royalty Income Trusts
Royalty income trusts are a special type of entity that oil and natural gas producers use to provide a secure financing source for the operations of their business. Royalty trusts generate income from the production of natural resources, such as coal, oil, and natural gas. Royalty trusts have no employees, no management, and no operations of their own. They exist strictly to own natural‑resource assets and receive royalties from the companies that are harvesting the natural resources they own. Royalty trusts tend to have very high yields because they are required to pay out virtually all of their cash flow as distributions.
Like MLPs, royalty trusts are considered pass‑through vehicles and are not subject to corporate tax at the federal level. Distributions from royalty trusts are also not considered taxable income by the IRS because of depreciation and depletion of the underlying natural resources that are owned by the trust. Like MLPs, distributions from royalty trusts reduce an owner’s cost basis in the stock and doe not get taxed until the shareholder sells their interest in the stock.
When an investor in a royalty trust sells their interest, they will be taxed at their capital‑gains rate based on their final cost basis and the current price of the royalty trust. Investors in royalty trusts may be able to claim unusual tax credits, such as receiving a credit for producing fuel from unconventional sources. These credits generally don’t amount to much, but they are a nice fringe to have.
Taxation of Business Development Companies
Business development companies (BDCs) are a special type of corporate entity that was created by Congress in 1980 to encourage public investment in privately held companies. Like REITs, MLPs, and royalty trusts, business development companies are pass‑through entities and are not taxed at the corporate level if they pay out 90% of their taxable income each year and derive more than 90% of their income from capital gains, dividends, and interest on securities. Just like with REITs, distributions paid by BDCs are taxed at an investor’s ordinary income rates and are not considered qualified dividends. For this reason, BDCs are best held in tax‑advantaged accounts like IRAs and self‑directed 401Ks.
Using your IRA to Invest in Dividend Stocks
At the beginning of each year, your first investment priority should be maxing out your individual retirement accounts (IRAs), your 401K/403B plan, and any other tax‑advantaged investment accounts you may have. Taxes on capital gains and dividends can eat up a significant portion of your investment income when you use a standard brokerage account, so always max out your tax‑advantaged investment options before investing through a traditional taxable brokerage account.
You can currently invest $5,500 per year (or $11,000 if you’re married) into an IRA. If you’re over the age of 50, you can contribute up to $6,500 per year (or $13,000 if you’re married). If you want to invest in dividend stocks in an IRA, make sure to sign up for an IRA with a company that allows you to buy and sell individual stocks and not just own mutual funds.
This means you should stick with IRAs set up by discount stock brokerages if you want to trade individual stocks, like TD Ameritrade, and avoid IRAs set up by mutual‑fund companies that only permit you to invest in their mutual funds.
There are two distinct types of IRAs. Traditional IRAs allow investors to receive an immediate tax deduction for contributions made to an IRA. However, you will have to pay your ordinary income tax rate on any money you withdraw from your IRA during retirement. Roth IRAs do not offer an up‑front tax deduction like a traditional IRA. Any dividends or capital gains earned by investments in your Roth IRA are not taxed and you can withdraw from your Roth IRA at age 59 ½ tax‑free. It may be somewhat difficult to determine which choice is optimal for your situation, because you don’t know what tax rates will be when you retire and you may not know what tax bracket you will be in during your retirement years. I personally invest in a Roth IRA simply because I would rather pay taxes on money before it benefits from decades of dividend and capital gains, but you may want to consult a financial professional to determine which type of IRA is most appropriate for your situation.
IRAs are perfectly appropriate investment vehicles for most types of securities, including individual stocks, bonds, certificates of deposit, mutual funds, exchange‑traded funds, and even real estate. IRAs are also appropriate to hold regular dividend stocks, real‑estate investment trusts, royalty trusts, and business‑development companies. MLPs are an exception and should not be held in an IRA because they lose their tax benefits when held inside an IRA. You should also not hold collectibles in an IRA, including artwork, antiques, gems, stamps, and coins. Finally, you cannot hold life insurance policies in an IRA and you cannot buy securities on margin inside of an IRA.
If you are above the income limit to contribute to an IRA each year, you may still be able to contribute to a Roth IRA because of a tax loophole that allows you to contribute to a non‑deductible IRA and immediately convert it into a Roth IRA. This loophole is commonly referred to as a “backdoor Roth IRA.” There are specific rules about your non‑deductible IRA contributions and when they can be converted into a traditional Roth IRA, so talk to your financial advisor or accountant about how to properly use this strategy before trying to implement it yourself.
Using Employer‑Sponsored Retirement Accounts to Invest in Dividend Stocks
After you have maxed out your IRAs, you will then want to move on to any retirement plans you have through your employer such as 401Ks and 403Bs. If you are self‑employed, you can set up your own retirement plan through a Simplified Employee Pension (SEP) or through an Individual 401(K). Unfortunately, most employer‑sponsored retirement accounts do not permit you to invest in single stocks and give you a limited selection of mutual funds to choose from. If this is the case, I suggest choosing a more traditional age‑appropriate asset allocation of stocks and bonds for your 401K plan.
However, some 401K plans do permit you to place the majority of your 401K contribution into a self‑directed brokerage account. For example, I recently set up a 401K plan for MarketBeat with Vanguard through a company called Ascensus, which allows me to place 90% of my monthly contribution into a self‑directed brokerage account through TD Ameritrade. I primarily use my 401K brokerage account to hold REITs and other income assets that do not pay out qualified dividends.
Using a Health Savings Account for Dividend Investing
One additional tax‑advantaged investment account that you may not have considered is a health savings account (HSA). While most people use HSAs to pay for medical expenses with pre‑tax money, HSAs can also be used as a tax‑advantaged vehicle to set aside money for the future. If you have a qualifying high‑deductible health plan, you can currently set aside $6,500 per year inside of an HSA. With your HSA, you will receive an immediate tax deduction for any contributions you make into an HSA. You can then use your HSA balance to pay for medical expenses tax‑free or you can invest your HSA in mutual funds and have a “medical IRA” of sorts to pay for future medical expenses you m
ay incur in your life.
You will probably have somewhat limited investment options inside an HSA, but there are HSA accounts that include dividend‑growth mutual funds that you can invest in. If you end up not needing the money for medical expenses, you can withdraw the money from your account and pay your ordinary tax rate as you would on a traditional IRA or 401K plan once you hit age 65.
Dividend Investing Through a Traditional Brokerage Account
After you have exhausted all of your tax‑advantaged investment accounts, then your next step is to start investing in dividend stocks through a standard taxable brokerage account. There are many perfectly good online discount brokerages that you can use to hold your dividend stock portfolio. When comparing brokerages, consider the fees that you are paying, the types of investments that are available to trade, the research tools that you have access to, the ease‑of‑use of the broker’s website and the brokerage company’s track record of customer service. There are many websites which compare brokers to one another, but be aware that many of those websites receive affiliate commissions for recommending certain brokerages over others. Your best bet is to read the marketing material published by each brokerage and use the brokerage that best suits your need.
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