Tax News Mutual Fund Tax Guide Foreign Tax Paid Some mutual funds invest overseas. These funds are likely to incur foreign taxes on interest and dividends. If the mutual fund meets certain requirements it can allocate this foreign tax to its shareholders, providing them with a tax benefit. If you receive a foreign tax allocation you have a choice. You can claim the foreign tax as an itemized deduction, or you can claim a foreign tax credit .
Many people take the deduction because it's easier, even though it means paying more tax.
But a procedure adopted in 1998 makes it possible for many people with small foreign tax amounts to claim the credit without doing these difficult calculations. Finding the Numbers Foreign tax paid will be reported in box 6 of Form 1099-DIV, Dividends and Distributions . If you're uncertain, contact your mutual fund or broker for clarification. In addition to the amount of foreign tax paid, you need to know how much foreign income you had if you claim the foreign tax credit. This isn't necessarily the same as the total amount of the dividend because the mutual fund may have some United States investments even if it's designed to invest primarily overseas.