I have a mutual fund for which Line 1a, Total ordinary dividend, is the sum of actual dividends paid and the Foreign tax paid on Line 6. What is the rationale for adding those items together? Is it that the foreign tax paid is from income not yet realized?
Best way to explain is an example: Company pays $100 dividend on shares. Foreign taxes withheld are 15%. You receive $85 cash. 1099-DIV should show a $100 dividend and $15 foreign taxes paid.
You take a $15 credit on your tax return. You received $100 (85 cash +
15 tax benefit). You report $100 of income and pay tax at ordinary rates unless it is a qualified dividend and you pay at capital gains rates.
Let me see if I understand your example by repeating it using my words.
I receive $100 of income reported on Line 1a. Foreign tax authorities have already taken $15 from it. I calculate US tax for $100. To avoid double taxation, I am getting a tax credit from the US so that my US tax is reduced by what was already taken as foreign tax.
Do I have it correct?
I went to
Yes... that was the amount of the dividend.
Very similar to US income tax withholding for people subject to backup withholding. It has no affect on the amount of the dividend.
Yes... that was the amount of the dividend.
Yes.
Yes.
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