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Qualified Dividends

Qualified Dividends


When determining your dividend income, it’s important to realize that not all dividends are considered the same by the Internal Revenue Service. Therefore, all dividends are not taxed the same way.  As members of the Berkley, California community, and experts on dividend income, Business Management Systems is available to help you determine how your dividend income will be taxed, and which way to claim that income.




The aspect of filing dividend income that will most likely be the most confusing for taxpayers unfamiliar with tax law is figuring out whether your income is coming from an unqualified or qualified dividend, and what that means for your taxes.  Knowing the definition of your dividend income can save or cost you additional money, depending on the guidelines associated with the type of dividend income you have received.  The two definitions of dividend income you are looking to determine are qualified and unqualified.


  A qualified dividend is a type of dividend that is taxed at the capital gains tax rate.  Generally, you are taxed 15% on your capital gains, and therefore the same amount on your qualified dividend income.  In cases of high income, exceeding $400,000.00, your capital gain rate and your qualified dividend tax rate increases to 20%.  In California, capital gains are able to be taxed at the highest rate, 13.3%.  If you add this to the Federal tax, California has the highest capital gain tax in the United States.  However, qualified tax rates are lower than unqualified or ordinary dividend tax rates, which are charged as normal income tax.  The difference can be quite significant, and is generally higher no matter what your tax bracket may be.  


In addition to the qualified dividend tax rate, the Affordable Care Act charges a Medicare fund fee of 3.8% on all net investment income for taxpayer's whose adjusted gross income exceeds a certain threshold ($200,000-$250,000 depending on filing status).   This tax is separate from the income tax, however, it affects investors the same way a higher tax rate would.  This surcharge applies to qualified and unqualified dividend income.


Qualified dividends are dividends from shares in U.S. based corporations, or qualified foreign corporations.  They must be held for a minimum measured time, known as the holding period.   The holding period is the same for mutual funds and stock, but the method of determining that period can vary.  This can be done using the information on the 1099-DIV.  Aside from the holding period, the shares must be unhedged, which means there would be no short sales or calls associated with the shares while in the holding period.  


A United States corporation is a qualified corporation, and given that the above requirements are met, dividends received are qualified.  Dividends received from a foreign corporation can only be considered qualified if the company is qualified.  In order to be qualified, it must be tied to the United States in some way or be located in a country that has a tax agreement with the Internal Revenue Service and Treasury Department.  To find out if a foreign corporation is qualified, seek counsel from Business Management Services by clicking the link at the bottom of this article. 


Most regular dividends from companies based in the United States are qualified.  However, there are several circumstances in which dividend income may be considered unqualified.  An unqualified dividend is defined by the Internal Revenue Service and the State of California as a dividend that does not qualify for tax preference, due to certain guidelines set by the tax laws. This means that an unqualified dividend will be charged your regular income tax rate, and will not receive the reduced capital gain rate.  To determine your income tax rate, you will refer to your tax bracket based on your income and filing status as determined by the Internal Revenue Service.  Your tax professional can assist you in calculating this rate, and advise you on how it will affect your income taxes.  


Some common examples of unqualified dividends are:



Master Limited Partnerships-  Limited partnerships that are publicly traded on exchange.  Combines guidelines of a limited partnership with publicly traded securities.  Examples include mining, extraction, and refining of oil and gas.



Real Estate Investment Trusts- Security invested in real estate through mortgages or property.  Often trades on major exchanges.



Employee Stock Options- Dividends received by an employee for taking the option to invest in their employing company’s stock.



Tax Exempt Company Dividends- A distribution from a fund which is not subject to tax

Savings Account Dividends-  Interest payments from a savings account


There are more, less commonly occurring unqualified dividends that your tax professional will be able to define for you. To ask about unqualified dividends, or to determine whether your dividend income is qualified, call Business Management Services in Berkley, California by clicking the link following this article.  Once you and your tax consultant have defined whether your dividend income is qualified or unqualified, you will be able to determine the rate at which you will be taxed on that income.  



Determining whether your dividends are qualified or unqualified is an important part of filing responsibly and making sure you are taxed only what you owe.  Knowing how to report this income properly will allow you to take advantage of the reduced tax rate associated with qualified dividends.  To speak to someone today about filing your dividend income, click the link below.




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