How does taxation of foreign dividends work?

Taxation of foreign dividends works differently for residents of Pennsylvania than it does for non-residents. For residents, foreign dividends are subject to the same tax treatment as domestic dividends, meaning that the dividend income is subject to state and federal income tax as well as any applicable local taxes. The foreign dividend income may also be subject to a tax credit, which is a credit that offsets the total amount of taxes paid on foreign dividends. For non-residents of Pennsylvania, taxation of foreign dividends is more complicated. Non-residents may be eligible for a Foreign Tax Credit which allows them to deduct taxes paid to another country on foreign dividends against their US taxes. However, they must report foreign dividend income to the US government via their US income tax return and may have to pay taxes to Pennsylvania based on their state tax rate. Finally, both residents and non-residents of Pennsylvania have to report foreign dividend income to the US government and may have to file a Form 1116 if the amount of foreign taxes paid is greater than the amount of US taxes due on the foreign dividends. This form is used to help calculate the amount of the foreign tax credit, which can be used to reduce US taxes owed on foreign dividend income.

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How does taxation of foreign dividends work?

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