How to Reclaim Overpaid U.S. Dividend Withholding Tax as an International Investor?

Investing in US stocks provides you with attractive dividend income, but do you know that the IRS withheld more tax than necessary? Like you, many international investors were unaware of this. Considering this, in many scenarios, they end up paying the default 30% US dividend withholding tax because they forget to submit or update tax documentation.

Here, the good news is you can claim your overpaid U.S. dividend tax. However, it is vital to understand the India-US treaty, maintain a valid Form W-8BEN, and file the appropriate US tax return. Confused about how to reclaim overpaid US dividend withholding tax as an NRI? This blog provides you with complete information about it and explains how over-withholding tax happens in the US. So read on and clear all your doubts.

What is U.S. Dividend Withholding Tax (DWT)?

When U.S. companies pay dividends to non-resident investors, the Internal Revenue Service (IRS) withholds up to 30% of the dividend payment automatically. Considering this, the tax deduction applies to:

• Overseas employee shareholders
• Individual international investors
• Global mutual fund or ETF investors

For most non-resident individual investors, it is a final withholding tax, meaning the tax is collected upfront rather than through a tax return filed later. However, the 30% dividend withholding tax is by default. Considering this, the double tax avoidance agreement (DTAA) between the US and the other 65+ countries, including India, reduced this tax rate for eligible investors.However, to claim the reduced tax rate, the investors need to submit the correct documents before the dividend payment.

This was all about U.S. dividend withholding tax. Moving ahead, let's know why NRIs overpay these taxes.

Why NRIs May Overpay U.S. Dividend Withholding Tax (DWT)?

Under the US-India tax treaty, instead of the standard 30% tax on dividends, individual portfolio investors qualify for a reduced 25% withholding rate. Additionally, a lower 15% tax rate is also available only for corporate shareholders holding a minimum of 10% of the voting stock of the company.

However, unlike the standard tax rate, the lower rate does not apply automatically. Considering this, you need to submit a valid Form W-8BEN to your broker, certifying your Indian tax residency and treaty eligibility.

For the following reasons, NRIs generally end up overpaying the US dividend withholding taxes:

• Fail to submit Form W-8BEN to the broker and face a 30% withholding tax rate.
• Form W-8BEN is valid for three years. Considering this, once it expires and you do not update it, your broker will revert to the default tax rate.
• Opening the account before completion of treaty documents also triggers the 30% standard dividend tax rate.
• Even when everything from your side is accurate, withholding mistakes do happen because of errors in the system of broker.

To avoid these issued it is advisable to check your Form 1042-S annually. It is an annual statement sent by the US brokers to foreign account holders. If you are eligible for the tax treaty and the withholding rate shows 30% instead of 25%, you need to claim your tax refund.

So here is why NRIs may overpay U.S. dividend withholding tax. Moving further, let's know who can reclaim these overpaid taxes.

Who Can Reclaim Overpaid U.S. Dividend Withholding Tax?

You can generally claim a refund for overpaid U.S. dividend withholding tax if:

• For US tax purposes, you are a non-resident alien. Most NRIs living in India come into this category.
• Received a US-source dividend income during the tax year.
• Tax was withheld at a higher rate than what you were entitled to under the US-India tax treaty.
• For refund claims, you were within the IRS tax filing window

Further, claim refunds within three years from the original return due date or two years from when you actually paid tax- whichever is later. In case you have overpaid the taxes across multiple years, you need to check each year separately since older years may now fall outside the window.

This was all about who can reclaim overpaid U.S. dividend withholding tax. Moving ahead, let's know how to reclaim these taxes.

How to Reclaim Overpaid U.S. Dividend Withholding Tax?

Here is how you can reclaim overpaid dividend withholding tax for non-resident aliens:

• Confirm your tax overpayment. For this, compare the withholding tax rate on your Form 1042-S against the 25% tax treaty you are eligible for.
• Get or update your Form W-8BEN. Fill out this form and submit it to your broker so that your future dividends are withheld correctly at source. Although it does not fix your past overpayment but helps in avoiding in the future.
• File Form 1040-NR for the relevant tax year and report your dividend income on Schedule NEC (income not connected effectively with a US business) at the correct tax treaty rate.
• If needed, also attach Form 8833 to disclose our treaty-based position, as some dividend rate claims qualify for a reporting exception. Additionally, including this form provides clarity and reduces the chance of follow-up from the IRS.
• Claim the Refund. It is the difference between the amount withheld and what you actually owe under the tax treaty.
• If you do not have an ITIN, obtain one first. This is because you cannot file Form 1040-NR without a valid US taxpayer identification number.

Documents Required to Claim a Refund

The documents required to claim a tax refund are as follows:

• Form 1042-S: Shows the gross dividend amount and tax withheld, annually issued by your broker.
• Form W-8BEN: Proof of your tax treaty claim, submitted to your broker.
• ITIN: Required to file Form 1040-NR; apply via Form W-7 if you do not have one.
• Brokerage Account Statements: Supporting records of received dividend payments.
• Prior Year Tax Filings: If you are claiming overpaid taxes for an earlier year, confirm what you already reported.

These are the documents required to claim a refund of U.S. withholding tax. Moving forward, let's know the common mistakes to avoid when claiming US withholding tax.

Common Mistakes to Avoid

Common mistakes to avoid when claiming overpaid U.S. dividend withholding tax are as follows:

• Assuming the broker will fix the issue automatically. Once tax is withheld and reported to the IRS, you can recover the excess amount only through a filed tax return. Considering this, brokers generally won't issue a retroactive refund themselves.
• Letting Form W-8BEN expire. It is the single biggest reason for ongoing tax overpayment.
• Missing the tax refund claim deadline. Waiting too long to claim the refund results in losing access to refunds for older tax years.
• Filing Form 1040 instead of Form 1040-NR. Using the wrong tax form can delay or complicate the refund processing.
• Not applying for an ITIN early enough. ITIN processing takes several weeks, and you cannot file a tax refund without it.

These are some common mistakes to avoid when claiming overpaid IRS dividend withholding tax.

Final Thoughts

Lastly, paying more US withholding tax on dividend income than required is a common issue for NRIs. Considering this, understanding your treaty entitlement, maintaining a valid Form W-8BEN, and filing Form 1040-NR helps you claim a U.S. dividend tax refund. Additionally, it also ensures future dividend income is taxed at the tax treaty rate.

Further, if you need any help in claiming a refund on overpaid U.S. dividend withholding tax, connect with Savetaxs. We have a team of professional tax experts who help NRIs claim tax refunds on overpaid taxes. Additionally, they can also help you with your U.S. tax and investment planning.