I had previously read about Tax Withholding in the United States, but I haven’t really had the chance to experience it until recently.

If you are unaware, three key types of withholding tax are imposed at various levels in the United States:

  • Wage withholding taxes,
  • Withholding tax on payments to foreign persons, and
  • Backup withholding on dividends and interest.

We are interested in specifically withholding tax on payments to foreign persons. Based on Wikipedia, you can see that “.. payments subject to withholding include compensation for services, interest, dividends, rents, royalties, annuities, and certain other payments. Tax is withheld at 30% of the gross amount of the payment.”

What does this mean to you, the investor?
Simple. Dividends is taxed at 30%.

Anyway, just to relate my experience, I picked up a single unit of AAPL some time ago via Standard Chartered Online Trading. (and the exchange rate sucked, by the way)
Whaaaaaat? Now, just hang on a minute, isn’t this an index investing blog? Well, yes, it is. My “investment” fund is solely devoted to index investing. 
However, my “hobby” fund is meant for whatever I want to use it for. Some people collect stamps, some people collect toys ; I collect stocks. You are not encouraged to this. At all.
Okay, now that I’ve addressed this, let’s head back to Tax Withholding in the United States. I picked up AAPL not because of it’s dividends, but because of this I was able to see how it worked.

On April 23, 2013, Apple’s Board of Directors approved a 15% increase in the Company’s quarterly dividend and has declared a cash dividend of $3.05 per share of the Company’s common stock. The dividend is payable on May 16, 2013, to shareholders of record as of the close of business on May 13, 2013.

On the 20th, the dividend was promptly credited into my Standard Chartered account. 
As you can see, the dividend is indeed USD $3.05 as stated in Apple’s website. Notice there is another record stating US Withholding Tax of USD $0.92. Well, guess $3.05 * 30% = $0.915.
If you’re following the advice of Millionaire Teacher Andrew Hallam and investing into a world stock ETF such as Vanguard Total World Stock ETF (which gives quarterly dividends), now you know why your dividends are shrinking! Of course, this applies to any dividends paying stock in the US, such Microsoft, Walmart and Intel. Noobie investors, take note!