Ch 5 - Terms (Interest and Dividends) Flashcards
Basis
The amount assigned to an asset from which gain or loss is determined for income tax purposes. For assets acquired by purchase, basis is cost. Special rules govern the basis of property received by virtue of another’s death or by gift; the basis of stock received on a transfer of property to a controlled corporation; the basis of the property transferred to the corporation; and the basis of property received upon the liquidation of a corporation
Capital Gain Distributions
Amounts paid by mutual funds, regulated investment companies, and real estate investment trusts. These amounts represent the shareholder’s portion of gain from the sale of capital assets owned by the investment companies. Capital gain distributions are taxed in the year constructively received and are always considered to be held long term.
Mutual Fund
An open-ended investment company that pools money from many investors and invests the funds in stocks, bonds, money market instruments, and other securities. Mutual funds must be registered with the Securities and Exchange Commission (SEC) and are subject to SEC regulation.
Nontaxable Distributions
A general term applied to stock dividend distributions that are not taxable. These distributions generally take the form of return of capital, stock dividends, stock splits, and/or tax free distributions.
Ordinary Dividends
Ordinary dividends are the most common type of distribution from a corporation. They are paid out of the earnings and profits of the corporation. Ordinary dividends are taxable as ordinary income unless the are qualified dividends.
Ordinary Income (Loss)
Income (loss) that is fully includable in (deductable from ) gross income and that does not have the characteristics of capital gain or loss.
Qualified Dividends
Certain ordinary dividends that meet the criteria to be taxed at the same tax rates as long-term capital gains, which are lower than rates for ordinary income.
Returns of Capital (Nontaxable Distributions)
A return of a shareholder’s investment in a company, generally made because an excess amount of capital has been accumulated. Returns of capital may be received in cash or reinvested to acquire additional shares at the shareholder’s request. If the amounts received do not exceed the taxpayer’s basis of the stock, the returns are not taxable. However, the basis of the stock on which returns of capital are paid must be reduced. Amounts received in excess of the taxpayer’s basis in the stock are taxable and reported on Schedule D, in Part I if stock has been owned short-term, or in Part II if stock has been owned long-term.
Stock Dividend
Additional shares of stock distributed to shareholders in lieu of a cash dividend. The number of shares received are a percentage of the shares owned. The basis of the original shares is generally apportioned equally to the total shares owned after the distribution.
