Foreign dividends and the foreign tax credit
An investor with foreign tax withheld on international-fund dividends. The key move: claim the foreign tax credit directly on Schedule 3 under the small-amount exception, skipping Form 1116.
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Taxpayer facts
Who this is and what their year looked like.
Owen is single, a software engineer in Nashville, Tennessee, with a taxable brokerage account that includes an international index fund.
His W-2 covers his salary. His 1099-DIV shows ordinary and qualified dividends plus a small amount of foreign tax paid on the international holdings.
Source documents
The 2 documents you will prepare the return from: W-2 (Wage and Tax Statement), 1099-DIV (Dividends and Distributions).
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Objectives
What a correct return should capture.
- Report ordinary dividends (1099-DIV box 1a) on the 1040 and Schedule B.
- Qualified dividends (box 1b) are taxed at preferential rates via the Qualified Dividends and Capital Gain Tax Worksheet. Compare taxable income to the 2025 single 0% ceiling ($48,350) to find the rate.
- Foreign tax paid (box 7): claim it as the foreign tax credit. Because the total foreign tax is $300 or less (single) and comes only from passive 1099 sources, you may claim it directly on Schedule 3 WITHOUT filing Form 1116: the small-amount election.
- Remember a credit beats a deduction: the FTC cuts tax dollar-for-dollar, versus deducting foreign tax on Schedule A.
- Work the ordinary-income layer and the qualified-dividend layer separately, then subtract the credit.
- Note that Tennessee has no state income tax (the Hall tax on interest and dividends was fully repealed).
Check your work
The answer key and the complete return, the way a real client receives it: the 1040 and its schedules, the workpapers behind every number, and the signature forms.
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