How Foreign Dividend Stocks Can Cost You

It's been tough for investors in the U.S. to get much income from their portfolios from traditional sources like fixed-income investments, and so dividend stocks have gotten a lot more popular in recent years. Although there are thousands of U.S. stocks that pay dividends, many international companies also have lucrative dividend payouts that attract millions of investors. Yet before you start looking at those mouth-watering yields on overseas stocks, keep in mind that the IRS and its counterparts abroad could well end up taking an unexpected share of those payouts -- even if you otherwise wouldn't owe any taxes at all.

For U.S. investors who stick with domestic stocks, taxes are pretty straightforward. When you receive dividends from stocks you own in a regular taxable account, you include the dividend income on your tax return and pay the appropriate tax. For foreign stocks, though, things get more confusing. Dividend income from a foreign corporation can technically be what's known as foreign-source income, which means that the country in which the company resides gets the first crack at taxing the dividends it pays out. That would potentially leave you having to file a tax return in dozens of different countries. In order to simplify matters and ensure that they get their cut, most foreign tax agencies never give you a chance to beat the tax rap. Instead, they withhold the taxes due at the source: from the companies themselves or from the financial institutions that hold shares on your behalf.

Source: Motley Fool

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