Dividend Withholding Tax.
If you are an international investor or overseas employee shareholder and you are receiving U.S.-based dividends, it’s very important to become familiar with these three words.
After all:
- The IRS will generally impose Dividend Withholding Tax (DWT) of up to 30% on it.
- Many investors (who are not U.S. residents) may be entitled to DWT refunds as a result of tax treaty benefits.
- Sprintax Dividends supports international investors and employee shareholders with their U.S. dividend tax reclaim.
In this guide, we will explore who is entitled to avail of a U.S. DWT rebate and how to go about claiming it.
How much DWT is applied to my U.S. dividend?
The DWT rate imposed on U.S. dividends which are paid to nonresident individuals is 30%, unless documentation has been provided to apply a reduced rate (form W-8BEN).
However, the U.S. has signed tax treaty agreements with more than 65 countries which entitle many investors to benefit from a reduction in DWT.
Keep in mind though that this benefit does not apply automatically – you have to claim it via documentation either before the dividend is paid or claim it on a U.S. tax return.
If no tax treaty agreement is in place between your home country and the U.S., you will likely be required to pay the 30% DWT.
But, if you are a non-U.S. individual who has paid 30% in U.S. DWT on your investment and you reside in a country that has a tax treaty with the U.S., you can reclaim your withheld dividend tax easily online with Sprintax.
How much will my DWT reclaim be worth?
In reality, billions of dollars in overpaid dividend tax go unclaimed every year.
This is largely down to the fact that the process of claiming the refund and completing the relevant paperwork is often time consuming and complicated.
Meanwhile, many investors are also completely unaware that they are entitled to claim a substantial amount of this tax back.
U.S. Tax Treaties
Exactly how much you will be due depends on your country of residency and whether or not a tax treaty agreement is in place between that country and the U.S., which will prevent double taxation.
For example, citizens of each of the countries listed below are entitled to benefit from a reduced rate of DWT.
- Canada: 15%
- United Kingdom: 15%
- Ireland: 15%
- Switzerland: 15%
- European Union nations: 15%
- Australia: 15%
- Japan: 10%
- India: 25%
- Singapore: 15%
- Saudi Arabia: 5%
Note: The above list is not exhaustive.
Sprintax Dividends will help you to determine whether or not you’re entitled to DWT refund.
Let’s take a look at a case study
John is a Canadian citizen working for a U.S. company in Toronto. He has received company stock as part of his employment renumeration. During the year, John was entitled to a dividend payment of $5,000.
Before John receives his dividend a flat DWT rate of 30% has been deducted. This amounts to $1,500.
However, as he is Canadian, John is entitled to benefit from a reduced rate (15%) of DWT applied.
Therefore, John is entitled to a DWT refund of $750. Not bad!
I had tax withheld on my U.S. ETF Distributions. Can I reclaim this tax?
If you’re an international investor who is receiving U.S. ETF distributions, it’s important to check your 1042-S forms that you receive from your ETF sponsor (Usually in the first quarter of the following year) to review the tax has been withheld.
These 1042-S income forms indicate important information such as the type of U.S. income you received, the gross amount of that income as well as the amount of tax that was withheld.
You can easily upload these 1042-S forms on Sprintax to get a free calculation as to whether there is an opportunity to reclaim tax on your U.S. ETF distribution. You can find our more on this in our U.S. ETF dividend distributions blog!
How do I apply for a U.S. DWT refund?
In order to apply for your dividend withholding tax refund, you must file a U.S. tax return with the IRS.
Based on the information that you provide, the IRS will assess your entitlement to a refund.
Who can help with your U.S. DWT reclaim?
Overpaid dividend withholding tax can easily add up to thousands of dollars annually.
Yet, most investors either don’t know they can reclaim it or don’t have the time or expertise to complete the paperwork.
Sprintax Dividends takes that burden off your shoulders.
At Sprintax, we process hundreds of thousands of U.S. tax returns each year. And now we have launched a new service specifically to support international individuals who wish to apply for a DWT refund from the U.S.
As part of your U.S. tax return, you will need a U.S. tax identification number – either an ITIN or SSN. If you don’t have a U.S. tax identification number, the good news is that Sprintax Dividends can help to prepare your ITIN application form.
You’ll need an ITIN for identification purposes, so that the IRS can certify that the application is being made on your behalf.
When is the deadline for claiming my U.S. DWT refund?
Didn’t claim your U.S. dividend tax refund in previous years?
No problem.
Sprintax Dividends allows you to file for up to three prior tax years directly from your account.
The amount of time it takes to receive your DWT will depend on factors such as the time of year you apply and whether or you have a tax number or not.
What documents do I need to apply for my DWT?
In order to apply for a DWT refund from the U.S., you’ll need your income documents, which are either your 1042-S or your 1099 form.
You’ll also need an ITIN or SSN.
Who should use Sprintax Dividends for a U.S. DWT refund application?
If you are a non-U.S. resident and have earned dividend income from American investments, this service is for you.
Specifically, our service helps:
- International employees who are located outside the U.S. and are receiving dividend payments from U.S.-based companies
- International investors who are using platforms like Charles Schwab, eToro, or Fidelity
- International investors of U.S. ETF’s (Exchange-Traded Funds) who may have had excess withholding on their ETF distributions.
How does it work?
When you create your Sprintax Dividends account, our system will guide you through the process of reclaiming your overpaid U.S. dividends easily online.
Our software will quickly determine your refund entitlement and help you to prepare the tax paperwork you need in order to apply for your refund.
- First, simply create your Sprintax Dividends account to get started
- Next, we will ask you some basic questions about yourself and your investment income. This will help us to determine both your U.S. tax residency status and your DWT refund entitlement
- We will ask you to upload your income documents which are relevant to your dividend such as your 1042-S form or 1099 forms
- We’ll then calculate your estimated refund and prepare your 1040NR form
- Need a U.S. tax number? Our software can also generate the W-7 form as part of the ITIN application.
FAQ’s
1. What if my country doesn’t have a tax treaty with the U.S.?
If your country does not have a tax treaty with the U.S., the full 30% rate applies.
2. How to avoid U.S. dividend withholding tax?
Generally, it can’t be avoided. However, the rate of tax can be reduced either at source with correct documentation like a W-8BEN for nonresidents or by claiming it back through a U.S. tax return.
3. How much dividend is tax-free in the U.S.?
U.S. dividends are generally not tax-free. The default tax rate is 30%, unless your country has a tax treaty that reduces it.
There is no tax-free allowance on U.S. dividend income.
Ready to reclaim your DWT?
Simply create your Sprintax Dividends account to get started.
