Dividends, Qualified Dividends, Reinvested Dividends

Question 1

What are dividends?

Answer 1

Distributions from Corporation/Mutual Fund to shareholders of money or other property out of E&P

Question 2

Is a distribution that is <= accumulated + current E&P a dividend?

Answer 2

Yes

Question 3

Is a distribution > accumulated + current E&P a dividend?

Answer 3

No. It is a Return of Capital. It reduces basis and is not taxable as long as Basis > 0

Once basis = 0 Then the distribution is considered to be a Capital Gain

Question 4

How are ordinary cash dividends (Paid out of E&P) taxed?

Answer 4

As ordinary income. This is the most common dividend type.

Question 5

What groups might issue dividends?

Answer 5

1. Corporations
2. Mutual Funds
3. Estates and Trusts
   4 Partnerships
4. Other entities that are treated like corporations

Question 6

Are dividends paid by a Savings and Loan or Credit Union considered Qualified Dividends?

Answer 6

no

Question 7

Do Money Market Funds pay interest or dividends?

Answer 7

Dividends - they are considered a type of Mutual Fund

Question 8

What forms can a dividend distribution take? (5)

Answer 8

1. cash
2. additional stock
3. stock rights
4. other property
5. services

Question 9

Are dividends received as a beneficiary of an Estate or Trust taxable?

Answer 9

Yes, it is a reported on a K1

Question 10

Are foreign source dividends reportable on a US tax return?

Answer 10

Yes: this is true whether or not the TP resided in the US
Exceptions: Exempt dividends by US law

Question 11

Are exempt-interest dividends from a mutual fund or other regulated investment company taxable?

Answer 11

No. If the exempt-interest dividend is after 12/22/2010 then it is not included in GI

Question 12

What are constructive dividends? Are they taxable?

Answer 12

They are payments from a corporation for personal expenses. Taxable.

Question 13

Are dividends paid on Veteran’s insurance taxable?

Answer 13

No

Question 14

What are stock dividends and stock rights? Are they taxable?

Answer 14

stock dividend: When a Corporation/Mutual Fund distributes stock to shareholders as a dividend.
stock right: A corporation/Mutual Fund distributes the right to buy stock in the future. Also know as stock options.

Generally, neither is taxable (exceptions apply).

Question 15

When are stock dividends taxable? (5)

Answer 15

1. When a shareholder can elect to receive cash/other property instead of stock dividends
2. Some shareholders receive cash and property while other shareholders receive stock dividends (which increases their interest in he coproration)
3. Some common stock holders receive a distribution in preferred stock and others receive common stock
4. The distribution is preferred stock (exception - only done to decrease conversion right - stock split)
5. Shareholder receives common stock + cash for a fractional portion of stock - fraction is taxable

Question 16

Are insurance policy dividends taxable?

Answer 16

No - if kept by the insurance company to pay premiums
No:: <= premiums paid - Return of Capital
Yes: > premiums paid
Interest = taxable

Question 17

Are liquidating dividend distributions taxable?

Answer 17

The distribution reduces the basis of the stock.

If distribution < basis Then not taxable - may have a capital loss

Any distribution in excess of basis is a capital gain.

Question 18

What is a non-dividend distribution? What are the tax consequences?

Answer 18

A distribution NOT from accumulated/current E&P

The amount reduces basis. The amount that exceeds basis is treated as a capital gain.

Question 19

A taxpayer bought stock in 2006 for $100. In 2009, the taxpayer received a non-dividend distribution of $80. In 2019, the taxpayer received a non-dividend distribution of $30. What are the tax consequences?

Answer 19

2009: Reduce the basis by the amount of the distribution 
Original basis  100
- distribution    (80)
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
Adjusted basis 20

2019: Reduce basis by distribution
Adjusted basis   20
- distribution       (30)
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
Excess of basis  10  : taxed as a capital gain

Question 20

What are the tax consequences when a dividend reinvestment plan allows the tp to buy stock at FMV?

Answer 20

Report the dividend amount as taxable

Basis of new shares = FMV

Question 21

What are the tax consequences when a dividend reinvestment plan allows the tp to buy stock at less than FMV?

Answer 21

Report as taxable dividend:

(# shares purchased * FMV/sh) + service charge

Basis of new shares = FMV

• service charge may be deductible as investment expense

Question 22

What are the tax consequences when a dividend reinvestment plan allow the tp to invest additional cash to buy stock at FMV?

Answer 22

Report as taxable dividend:

Cash Invested
-FMV stock bought
_______________
taxable dividend

Question 23

When are reinvested dividends taxable?

Answer 23

The year received

Question 24

What is the tax rate for reinvested dividends?

Answer 24

Ordinary tax rate

Question 25

What is the basis for stock bought with reinvested dividends?

Answer 25

FMV

Question 26

What are Qualified Dividends?

Answer 26

Dividends distributions out of E&P from a domestic corporation or qualified foreign corporation that are taxed at capital gains rates

Question 27

Requirements to be considered Qualified Dividends? (3)

Answer 27

1. paid by US corporation or Qualified foreign corp
2. not listed by the IRS as not qualified
3. meet the holding period requirements

Question 28

Requirements to be considered a Qualified Foreign Corp. for Qualified Dividend treatment? (3)

Answer 28

Corp. meets one of the following:

1. incorporated in a US possession
2. Eligible under a tax treaty
3. stock is readily traded on an established securities market

Question 29

Groups that are exempt from Qualified Dividend treatment ? (7)

Answer 29

1. REITs
2. Master Limited Partnerships (MLPs)
3. Money Markets, credit unions, savings and loans
4. Tax exempt Companies
5. employee stock options
6. special one-time dividends
7. hedging, puts, calls, short sales

All of the above get ordinary tax treatment

Question 30

What is the holding period for a Qualified Dividend?

Answer 30

common stock: Must hold for => 61 days of a 121 days. The 121 days starts 60 days before the ex-dividend date.

preferred stock: hold => 91 days of 181 day period starting 90 days before the ex-dividend date.

ex-dividend date is usually the day before the report date (day the company determines who qualifies for the dividend)

Question 31

Qualified Dividend holding period:
A tp purchased 1000 shares of company X common stock on May 1. The tp sold 100 shares on June 1 but continued to hold the remaining 900 shares. The ex-dividend date is May 15. How many shares qualify for qualified dividend treatment?

Answer 31

Holding period begins 60 days prior to ex-dividend date and the taxpayer must hold the stock for => 61 days of the 121 day qualifying period

• 60 days before ex-dividend date = 3/8
• 121 day period ends on 7/9
• sold 100 shares on 6/1 (30 days held): Not Qualified dividends - ordinary tax rates apply
• 900 shares are held > 61 days = Qualified Dividends- capital gains rates apply

Question 32

How are dividend distributions from a mutual fund taxed? Are they taxed if they are not received.

Answer 32

They are taxed at the LT capital gains rate no matter what the holding period is. They are taxed even if not received.

Question 33

How are mutual fund dividend distributions from a tax-exempt security taxed?

Answer 33

they are tax exempt

Question 34

How are REIT dividends taxed? Are they taxed if the taxpayer did not receive the distribution?

Answer 34

They are taxed as long term capital gains no matter what the holding period is. They are taxed even if not received.

Question 35

What is a capital gain dividend? How are they taxed?

Answer 35

A distribution of capital gains realized from the sale of investments in the fund. Tax as LT cap gains not matter the holding period

Question 36

Mrs. Kearney, a cash basis taxpayer, received notice from her Mutual Fund that it has realized a LT capital gain on her behalf of $2500. The Mutual Fund paid $500 in taxes on the gain. The Mutual Fund will not distribute the net capital gain but will credit the amount to her account. What are the tax consequences for Mrs. Kearney.

Answer 36

Undistributed capital gains credited to a taxpayer’s account must be included in GI in the year credited.

1. Taxpayer declares a capital gain of $2500
2. TP takes a $500 credit on investment income
3. Taxpayer increases her basis by $2000 (2500-500)