Dear Tax Talk,
I am a foreigner and live outside the United States. I owned some stock shares through a brokerage. Stock dividends were withheld by the brokerage on behalf of the IRS, and I had realized capital losses on stocks exceeding the dividend distributions during the year. Could I file a tax return (I don’t have a Social Security number) to claim a refund of the dividends being withheld?
A foreign person is subject to withholding tax on dividends received from a U.S. company. The tax rate is usually 30 percent, unless the individual is from a country with which the U.S. has an income tax treaty. A list of treaty partners can be found in Publication 901, beginning on page 34.
If you were entitled to a reduced rate because of a treaty, you will need to file a Form 1040NR to claim a refund of the withheld taxes. You will also need to obtain an Individual Tax Identification Number to file for the refund. Form W-7 is used for this purpose.
Although the dividends mitigated the amount of your losses on the stock, they are taxed apart from the losses. Dividends are a distribution of a company’s current and accumulated earnings and profits. The sale of the stock is a transaction apart from the distribution. There is no provision in the law to offset the two.
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.