US dividends and the treaty

Some of us are US/UK dual citizens and will be taxed on an arising basis in the UK. Some of us also have funds invested in the US to avoid PFIC issues. The question is how those dividends are taxed.

The UK will give a 15% FTC under Article 10 of the treaty on US sourced dividends and then enough of the dividend has to be resourced to the UK so that you get a US FTC on form 1116 to make your US tax on the dividends 15%.

But what of your income is within the 15% IRS tax bracket of $37450, this will put you well within the UK 10% income tax bracket. At this level of income the tax on dividends is 0% in both the UK and the US so there's no need to use the treaty or claim any FTCs in either country. You only need to worry about using form 1116 for US sourced dividends when your UK taxable income exceeds the UK basic rate of £31865.

I had to look up the difference between Ordinary and Qualified dividends. I guess I would get a bit of both with an index fund wouldn't I? The Qualified have to be in US corps only? I would think those would be individual stocks which I don't mess with.

I had to look up the difference between Ordinary and Qualified dividends. I guess I would get a bit of both with an index fund wouldn't I? The Qualified have to be in US corps only? I would think those would be individual stocks which I don't mess with.

It depends on the fund. If it's an S&P500 index fund all the dividends will be qualifying ordinary dividends, if it's an international fund you'll get more just ordinary dividends. Anyway as long as you meet the UK income requirements to pay no tax on dividends you only have to worry about paying tax in the US and there's no need for a 1116. The same goes for capital gains tax. Careful control of taxable income can allow you to pay low rates on dividends and capital gains in both the US and the UK and also simplify filing........all the more reason to get as much money as possible into your ROTH.

Too late on my doing ROTH conversions I think.....if I'd only known a few years ago.  I will be selling off another $80k or so of Vanguard at the first of the year and then we should be good on cash for a year+. I might be able to do a conversion in a couple of years(still trying to avoid the 25% bracket).

It depends on the fund. If it's an S&P500 index fund all the dividends will be qualifying ordinary dividends, if it's an international fund you'll get more just ordinary dividends. Anyway as long as you meet the UK income requirements to pay no tax on dividends you only have to worry about paying tax in the US and there's no need for a 1116. The same goes for capital gains tax. Careful control of taxable income can allow you to pay low rates on dividends and capital gains in both the US and the UK and also simplify filing........all the more reason to get as much money as possible into your ROTH.

I am pretty sure I read somewhere on the HMRC site that if a fund is mostly bonds then the dividends are treated as interest income, otherwise they will be treated as stock dividends.  This one of the reasons that funds have to be HMRC reporting.

I make it a rule never to own bond funds outside of a retirement account bacause they are not tax efficient.