Foreign Stocks Mean Foreign Taxes -- but You Can Get a Break

Investing internationally adds another layer of complication to your capital gains tax situation.

Motley Fool Staff
Motley Fool Staff
Jul 2, 2019 at 9:13AM
Other

It would be hard to find a podcast-hosting duo more fully invested in answering your financial questions than Alison Southwick and Robert Brokamp -- they even put "Answers" in their show's name! This week they're at it again, combing through theĀ Motley Fool Answers mailbag in search of conundrums to address for their listeners. But because three heads are better than two, for this episode, they have recruited senior analyst -- and frequent podcast guest -- Ron Gross to help out.

In this segment, they offer some tips to a listener who bought ADRs for a German company, and was none too pleased at the percentage of his dividends that he had to pay in German taxes.

To catch full episodes of all The Motley Fool's free podcasts, check out ourĀ podcast center. A full transcript follows the video.

This video was recorded on June 25, 2019.

Alison Southwick: The next question comes from Bill. "I purchased shares of a foreign company over the counter through an ADR." What does ADR stand for?

Robert Brokamp: American Depositary Receipt.

Southwick: Thank you! "All indicators said it pays a good dividend and it does; but, a big chunk is taken in German taxes. Ach du Lieber! They take a lot. I know you can't give tax advice, but what comments do you have?"

Brokamp: This is actually pretty frequent where when you buy shares of a foreign company the government will take some of those dividends and you'll see exactly how much at the end of the year when you get your 1099-DIV. Box 7 tells you how many taxes were withheld. The good news is you can get most or all of that back in the form of a tax credit as long as you know to do that on your tax return. In your case, Bill, it sounds like you probably can get most of that back.

That said, if you are holding this company in an IRA or a 401(k), you cannot take the credit, so you just lose it. Then people will say, "Well, should I hold all my foreign stocks outside of my IRA?" I would say if you're still saving for retirement and you're many years away from needing the money, I think it's still better to keep it in an IRA or a 401(k) because you don't want to pay taxes on those dividends each and every year.


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Even though many foreign stocks do keep some of those taxes on hold, the average international stock yields more than the average U.S. stock, so even accounting for those taxes you're still probably getting a higher yield than you're getting from a U.S. stock.