If you received dividend income for 2015, you will need to report this income to the IRS and to the State of Maryland. Dividend income is divided into two categories by the IRS, and this determines how it is taxed.
Dividends are payments made by a corporation to a person who owns stock in that corporation. The dividends are distributed to investors based on their profits after tax. The Internal Revenue Service and State of Maryland consider this dividend income to be taxable, and they must be reported when filing your taxes.
How dividend income is taxed is based on whether the dividend itself is qualified or unqualified. The Professional Accounting Center in Owings Mills, Maryland will determine for you the nature of your dividend income, and which category it falls into.
A qualified dividend is a type of dividend that is taxed at a preferred tax rate, which is the same as the capital gains tax rate. Although dividends and long-term capital gains are taxed at the same rates, capital losses cannot be used as a deduction to apply to dividend income. However, if you wind up with a capital loss calculating your capital gains, you may see an effect on your overall tax return. Three thousand dollars of capital loss per year may be applied to ordinary income, which may include dividends.
In the State of Maryland, the rates for qualified dividends can be up to 30%. Generally, however, you are taxed 15% on your qualified dividend income. In cases of high income, exceeding $400,000.00, your capital gain rate and your qualified dividend tax rate increase. Qualified tax rates are still significantly lower than unqualified or ordinary dividend tax rates, which are charged as normal income tax. Qualified dividends are dividends from shares in U.S. based corporations, or qualified foreign corporations. This would mean that the corporation is incorporated in an area owned by the United States. The corporation may also be in an income tax treaty with the US, approved by the Treasury Department. For example, Australia and China both fit into this category. The only circumstance in which a foreign corporation could still be qualified and not meet the above requirements is if the stock is tradable on an established securities market in the United States.
Qualified dividends 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. In order to be considered qualified, you must have held the stock for more than 60 days during the 121-day period that begins 60 days before the seller is declared to be the recipient of all future payments. When considering the holding period, you will count the number of days you held the stock, including the day you sold or disposed of the stock, but not including the day you acquired it. The 1099-DIV has information and figures that will help you determine this information. In the case of preferred stock, you must have held the stock more than 90 days during the 181-day period that begins 90 days before the ex-dividend date. Preferred stock is stock that entitles the holder to a fixed dividend whose payment has priority over that of common-stock dividends if the dividends are due to periods totaling more than 366 days. If the preferred dividends are due to periods totaling less than 367 days, the original holding period applies.
While most dividends from a United States corporation are considered qualified, there are several dividends that may be considered unqualified. For example, if your dividends are a result of employee stock options, this is considered an unqualified dividend, even though it is stock in a U.S. based company. The same dividend purchased privately and not as a result of employee stock options may be considered qualified. This can get somewhat confusing, and it is best to contact a professional if you are unsure whether your dividend income was received from a qualified or unqualified dividend source.
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, and does not come from a qualified source. Income from these dividends are taxed at your regular income tax rate. Some additional common examples of unqualified dividends include Master Limited Partnerships, Real Estate Investment Trusts, Tax Exempt Company Dividends, and even Savings Account Dividends.
Determining whether your dividends are qualified or unqualified is an important part of filing responsibly. Knowing how to report this income properly will allow you to take advantage of the reduced tax rate associated with qualified dividends. If you’re in the Owings Mills area, speak to someone today about filing your dividend income by clicking the link below.
Margaret Tabb