For many investors that buy stocks in corporations, they have often found themselves in receipt of dividends on a quarterly or annual basis. However, there are several different types of dividends that come into play regarding your potential taxable income from these investments. One such type of dividend is called the qualified dividend.
These dividends are a specific type that have capital gains tax rates are applied. These tax rates are typically lower than the normal income tax amounts. No matter what tax bracket you fall into, the difference between regular income tax levels and the lower capital gains tax means that you pay more taxes on an non-qualified payout. So how do you know if your dividend is a qualified dividend? One way to be sure is to consult with your accountant or tax professional, such as Denisha Marino of Golden, CO, who can assist you in determining if you have qualified dividends or not.
For a dividend to be considered a qualified dividend, it must meet the following criteria:
The capital gains tax rate for these qualified dividends is often defined by the individual’s ordinary income tax bracket. As of 2013, the rates on qualified dividends are 0%, 15% and 20%. The taxpayers who are paying the 20% are typically in the 39.6% tax bracket.
In order to be taxed at the qualified dividend rate for capital gains, a dividend must have satisfied the following points. The dividend was paid after December 31, 2002.
As previously mentioned, it must be paid by a U.S. corporation or one that is incorporated within a U.S. possession. The dividend may also be eligible if a foreign corporation located within a specific country that under the U.S. tax treaty is eligible for benefits by meeting specific criteria. Finally, a dividend may be eligible if it is from a foreign corporation’s stock that can be traded on an established U.S. stock market. These markets include the New York Stock Exchange, NASDAQ, AMEX or other domestic corporations that might not trade on stock exchanges.
A qualified dividend must be held for more than 60 days during the 121-day period that begins 60 before the ex-dividend date or reinvestment date. This is basically a way to define the timing of payment of dividends from income trusts, financial holdings or stock from various corporations. These can be either privately or publicly held. Essentially, if you purchase a stock before its ex-dividend date or after, you won’t receive the next dividend payment given by the corporation, but it will revert to the seller of the stock. However, if you purchase stock before the ex-dividend date, you will receive the dividend payment.
Preferred stock must be held for more than 90 days during the 181-day period beginning 90 days before the ex-dividend date, especially if the dividends are due according to periods that total more than 366 days. Ownership is calculated with the day of disposition included but not the day of an acquisition.
If a dividend does not meet any of the above criteria, then the qualified effective dividend tax rate is determined by the date the dividend was actually paid and the taxpayer’s ordinary income tax bracket.
The best way to determine if any of this information applies to your dividends and the income received, you need to discuss it with your tax professional or accountant. They can assist you in determining if your dividends and income from investments qualify for the capital gains tax or if you must pay the higher tax rate for this income.
Qualified dividends are part of the tax code as of January 2013, which was completed as part of the American Taxpayer Relief Act of 2012. However, this legislation is also added the 20% rate on income in the highest tax bracket of 39.6% or making over $450,000.
Here are a few examples of dividends that would be considered unqualified:
Finally, it is important to be sure that you accurately identify the type of dividend you have received, because if the dividend is not qualified, it could be costly to you. Call or click on the link below to contact Denisha Marino in Golden, CO, who can assist you in making sure that you are getting the benefit of capital gains tax rates when appropriate.
Denisha Marino