Investors holding shares of foreign stocks in taxable mutual fund accounts will find their amount of foreign taxes paid on Form 1099-DIV, in box 6. Such investors may prove eligible for a foreign tax deduction, but that’s often not the situation when foreign holdings are in an IRA.
TL;DR (Too Long; Didn't Read)
Unless you have begun making withdrawals from your IRA, you are not allowed to claim deductions on international taxes that have been paid as a result of holding foreign stocks. Specifically regarding Roth IRAs, foreign taxes will never qualify as deductions.
Understanding IRAs and Taxes on Foreign Stocks
If you haven’t started making withdrawals on your IRA, you can’t take a deduction for foreign taxes paid, as you aren’t paying tax on any IRA income. The same holds true for foreign taxes imposed on your 401(k) or similar qualified retirement plan. On the upside, the foreign taxes reduce your account’s earned income. Why is that a plus? Once you begin making withdrawals and are subject to tax, you are taxed only on the net amount, so it works much like an itemized deduction in relation to foreign taxes.
Understanding IRA Withdrawals and Taxes on Foreign Stocks
Once you start making withdrawals from a traditional IRA, these distributions are treated as ordinary income for the year in which you receive the funds. At that point, you can take any available foreign tax deductions or credits. You can take a credit or a deduction, but you cannot take both. Since you are taxed only on the net amount withdrawn, you must figure how the foreign tax applies to that figure. If your holdings are in mutual funds, Form 1099-DIV will show your share of foreign income, foreign taxes paid and the country in question. You must itemize to report such deductions on Schedule A of Form 1040. If you are making withdrawals but the account is a Roth IRA, you aren’t paying taxes on these distributions, so the IRS doesn’t permit a deduction.
2018 Taxes on Foreign Stocks
The Tax Cuts and Jobs Act, signed into law on Dec. 22, 2017, makes huge changes to the way foreign stocks are treated for income tax purposes, but few of these changes relate to individual taxpayers. Most refer to foreign companies owned by U.S. corporations, not shares held by individual investors. The new law lowered individual income tax rates and also nearly doubled the standard deduction. The standard deduction is now $12,000 for single filers and $24,000 for those married and filing jointly. That means fewer people will itemize deductions, including those seeking an IRA tax credit or foreign tax deduction.
2017 Foreign Income Tax Credit
For most people, taking a tax credit makes more sense than taking a deduction, as the credit offers a dollar-for-dollar reduction on their tax bill. If claiming such a credit, the IRS requires that the tax is imposed on you and you have either paid it or accrued it. It must be some form of income tax, as well as the actual foreign tax liability. A tax in lieu of income tax may qualify if it is “not payment for a specific economic benefit,” as per the IRS, and such a tax must be imposed instead of an income tax.
- IRS: Foreign Tax Credit
- IRS: What Foreign Taxes Qualify For The Foreign Tax Credit?
- Charles Schwab: Claiming Foreign Taxes: Credit or Deduction?
- Journal of Accountancy: Foreign income provisions in the Tax Cuts and Jobs Act
- IRS: Foreign Tax Credit - Choosing To Take Credit or Deduction
- T. Rowe Price: 2017 Tax Reporting for Foreign Taxes Paid