How do I avoid double taxation of dividends and capital gains?
I'm a U.S. citizen living abroad claiming the Foreign Earned Income Exclusion (FEIE). According to www.americansabroad.org/us-taxes-abroad-for-dummies-update/,
The exclusion applies only to earned income. Other income, such as pensions, interest, dividends, capital gains, etc., cannot be excluded with the FEIE. You are liable for full US tax on this type of income.
However as I understand it, the FEIE is entered as a negative number on Line 21 ("Other income") of form 1040, and then combined with all other sources of income (including dividends (line 9a) and capital gains (line 13)) to obtain the total income (line 22), in which case it would seem to effectively 'apply' to these types of income.
Can someone explain this apparent discrepancy?
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If you read a bit further down, you'd see the explanation, as well as one alternative.
FEIE can only reduce your taxes by the amount of your foreign earned income, up to a cap (a bit over 0k). So if you have earned income of 9k in the example, that would be taxed at around k; 0k would be taxed at around k, leaving k tax bill remaining.
If you have capital gains, that is just in addition, so the tax from that and the tax from dividends would be in addition to that k.
Earned Income - 9k
Capital Gains - k
Tax on Earned Income - k
Tax on Capital Gains - .5k
FEIE exlusion - k
Total tax = k - k + .5k = .5k
However, the way you avoid double taxation on capital gains, if you owe it, is with the Foreign Tax Credit. Any tax you paid on those capital gains to the other country would also be a credit towards your taxes here. So if you paid k in capital gains overseas, you would only owe 0 here from the capital gains, for a total of .5k total owed.
There also may be a tax treaty between your country of residence and the US that may apply.
What discrepancy? You enter all the earned income on Line 7 and get to reduce it by the FEIE which you enter as a negative number on Line 21. So your AGI is the total of earned income less the FEIE amount plus the dividends, capital gains etc. Thus, dividends, capital gains etc are subject to US tax and only the foreign earned income is excluded from US tax (up to the maximum allowable exclusion for income earned abroad).
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