I am considering buying shares of a Canadian Pipeline corporation that pays qualified dividends but in a taxable accounts will withhold 15% of the dividend for Canadian tax. Let’s say all of my qualified dividends fall within the 12% bracket thus my tax rate on my qualified dividends will be 0%. Can I still take the 15% withhold as a foreign tax credit?
If your foreign tax (FT) for all your income is less than 300 (600 if MFJ), then the simplified method in the link applies and you get to take the full credit for the foreign taxes you paid.
If your FT exceeds those limits above, you need to calculate your credit using F1116. In the typical case you compare the foreign tax you paid against the US tax you paid on the same amount of income as the foreign income. If you go through F1116, the calculation in the simple cases does not distinguish between qualified dividend taxation and normal taxation. It basically gets an effective tax rate on all your income and applies that to the foreign income. You then get credit for the lesser of the foreign tax or the US tax on that income using that effective rate.
This reply was modified 2 years, 8 months ago by kaneohe.
Thanks. I drew the same conclusion in reading through Form 1116. This just seems like a double benefit: 0% tax on the dividend yet the ability to subtract 15% of it as a tax credit. Its not much $$….but I’ll take it.
Will you be getting the credit under the simplified method or will you be using F116? Under the simplified method, you get a generous break…….the FT back,no questions asked. If you use F1116, the effective rate will be a blend of 12% on the ordinary income and 0 for the QDIV/CG income so somewhere in between.