Q&A: Dominic Coyle – Claiming back tax on US dividends?

Am I able to reclaim the overseas tax on US dividends? If so how do I go about it? And how are US dividends taxed in Ireland? How do you show them on the tax return Form 11?

Mr BL, email

Dealing in foreign shares can get very complicated but it is increasingly a reality for Irish investors, not least those who originally invested in Eircom.

Not only will they now have a stake in UK share Vodafone but, following the most recent restructuring of their holding, they may also hold a small stake in US telecoms group Verizon.

While people holding just a handful of Verizon shares were advised to sell them at the time of that deal, many did not and the truth of it is that the cost of managing the shares may render them virtually worthless to you.

In terms of dividend income, Rory Gillen of Gillen Markets explains very simply the situation on how foreign shares are taxed.

As he explains on his site gillenmarkets.com, the United States’ Inland Revenue Service (IRS) imposes a 30 per cent withholding tax on dividend income from US-listed shares held by people who are not tax resident in the US.

You can reduce that withholding tax to 15 per cent but, to do so, you will need to complete what is called a W8-BEN form, which can be downloaded online. It is not a difficult form to complete and, as you might expect from the US tax authorities, extremely detailed instructions are also available online that will guide you, literally line-by-line, through the one-page form.

So, you’ve filled up your W8-BEN form and returned it and your next dividend is paid net of 15 per cent tax. What now?

You will receive 85 per cent of the gross dividend into your hand (or bank account, more likely). But the Government will assess this for tax as though it were 100 per cent of the dividend.

However, it will then allow for the 15 per cent paid against its assessment for tax.

Essentially that means you will only pay tax due above the 15 per cent – 5 per cent if you are a standard rate taxpayer and 25 per cent if you pay at the marginal 40 per cent rate, plus, of course, USC and possibly PRSI.

However, if you do not pay tax, the 15 per cent of the dividend withheld by the IRS is not refundable.

Of course, if you haven’t filled out W8-BEN, you will only get 70 per cent of your dividend into your hand and, unless you pay tax at 40 per cent, you’ll lose out.

Finally, as to the Form 11 treatment of such income, my understanding is that US dividend income is entered at line 308 of the form within Section D which deals with Foreign Income.

Details of the tax withheld is entered at line 315 and Irish tax deducted on encashment, if any, at line 316.

Inheritance tax and divorce

I'm divorced. Since a child can currently inherit €280,000 without incurring inheritance tax, does this mean that both my ex-husband and I can each leave property valued up to that amount? Ms CM, email

No, it doesn’t. The Category A threshold covering gifts from a parent to a child is not affected by issues such as divorce.

The limit that any child of yours can receive cumulatively from you and their father is €280,000 (leaving aside the €3,000 annual small gift exemption that is open to either or both of you to use). Small gift tax and paying for education Our daughter has three children at fee-paying schools. We would like to give each of the grandchildren €6,000 per annum while they are in secondary school.

Can the grandchildren use this money to pay their own school fees? If not, then what age would the grandchildren have to be for Revenue to allow them draw down this money for their education? Mr PD, email

This is the second such query in recent weeks. Clearly people are waking up to the opportunity for estate planning that the small-gift exemption allows.

However, the bottom line is that Revenue must be convinced that the gift s are indeed precisely that – a gift to the person nominally receiving it and not a sum passing on to a third party. Where parents choose to send children to fee-paying schools, it is the parents’ financial responsibility to meet those fees.

Revenue will certainly not consider it reasonable that children would be paying their own school fees from a gift received from grandparents.

The Revenue interpretation in those circumstances would be that the gift was made directly to the parents.

Of course, there is nothing to stop you gifting your daughter and her husband €3,000 each from each of you – a total of €12,000 from you to them.

That would be just €6,000 short of what you would like to gift via the children.

Naturally, if you are already availing of the small gift exemption to give money to the parents, any additional sums would count against their lifetime threshold limits beyond which they would face a 33 per cent tax bill.

In relation to your second query, there is no set age, as such, at which Revenue would deem it okay for the children to pay for their education. Essentially, as long as the children are dependent on their parents and remain in full-time education, Revenue is likely to expect that parents foot the education bills.

If, however, the children moved into the world of work and were financially independent, before subsequently returning to education, Revenue would see any education costs as falling on them.

Send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara St, D2, or email dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice.