Dividends, Qualified Dividends, Reinvested Dividends Flashcards
What are dividends?
Distributions from Corporation/Mutual Fund to shareholders of money or other property out of E&P
Is a distribution that is <= accumulated + current E&P a dividend?
Yes
Is a distribution > accumulated + current E&P a dividend?
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
How are ordinary cash dividends (Paid out of E&P) taxed?
As ordinary income. This is the most common dividend type.
What groups might issue dividends?
- Corporations
- Mutual Funds
- Estates and Trusts
4 Partnerships - Other entities that are treated like corporations
Are dividends paid by a Savings and Loan or Credit Union considered Qualified Dividends?
no
Do Money Market Funds pay interest or dividends?
Dividends - they are considered a type of Mutual Fund
What forms can a dividend distribution take? (5)
- cash
- additional stock
- stock rights
- other property
- services
Are dividends received as a beneficiary of an Estate or Trust taxable?
Yes, it is a reported on a K1
Are foreign source dividends reportable on a US tax return?
Yes: this is true whether or not the TP resided in the US
Exceptions: Exempt dividends by US law
Are exempt-interest dividends from a mutual fund or other regulated investment company taxable?
No. If the exempt-interest dividend is after 12/22/2010 then it is not included in GI
What are constructive dividends? Are they taxable?
They are payments from a corporation for personal expenses. Taxable.
Are dividends paid on Veteran’s insurance taxable?
No
What are stock dividends and stock rights? Are they taxable?
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).
When are stock dividends taxable? (5)
- When a shareholder can elect to receive cash/other property instead of stock dividends
- Some shareholders receive cash and property while other shareholders receive stock dividends (which increases their interest in he coproration)
- Some common stock holders receive a distribution in preferred stock and others receive common stock
- The distribution is preferred stock (exception - only done to decrease conversion right - stock split)
- Shareholder receives common stock + cash for a fractional portion of stock - fraction is taxable
Are insurance policy dividends taxable?
No - if kept by the insurance company to pay premiums
No:: <= premiums paid - Return of Capital
Yes: > premiums paid
Interest = taxable
Are liquidating dividend distributions taxable?
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.
What is a non-dividend distribution? What are the tax consequences?
A distribution NOT from accumulated/current E&P
The amount reduces basis. The amount that exceeds basis is treated as a capital gain.
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?
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
What are the tax consequences when a dividend reinvestment plan allows the tp to buy stock at FMV?
Report the dividend amount as taxable
Basis of new shares = FMV
What are the tax consequences when a dividend reinvestment plan allows the tp to buy stock at less than FMV?
Report as taxable dividend:
(# shares purchased * FMV/sh) + service charge
Basis of new shares = FMV
- service charge may be deductible as investment expense
What are the tax consequences when a dividend reinvestment plan allow the tp to invest additional cash to buy stock at FMV?
Report as taxable dividend:
Cash Invested
-FMV stock bought
_______________
taxable dividend
When are reinvested dividends taxable?
The year received
What is the tax rate for reinvested dividends?
Ordinary tax rate
What is the basis for stock bought with reinvested dividends?
FMV
What are Qualified Dividends?
Dividends distributions out of E&P from a domestic corporation or qualified foreign corporation that are taxed at capital gains rates
Requirements to be considered Qualified Dividends? (3)
- paid by US corporation or Qualified foreign corp
- not listed by the IRS as not qualified
- meet the holding period requirements
Requirements to be considered a Qualified Foreign Corp. for Qualified Dividend treatment? (3)
Corp. meets one of the following:
- incorporated in a US possession
- Eligible under a tax treaty
- stock is readily traded on an established securities market
Groups that are exempt from Qualified Dividend treatment ? (7)
- REITs
- Master Limited Partnerships (MLPs)
- Money Markets, credit unions, savings and loans
- Tax exempt Companies
- employee stock options
- special one-time dividends
- hedging, puts, calls, short sales
All of the above get ordinary tax treatment
What is the holding period for a Qualified Dividend?
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)
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?
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
How are dividend distributions from a mutual fund taxed? Are they taxed if they are not received.
They are taxed at the LT capital gains rate no matter what the holding period is. They are taxed even if not received.
How are mutual fund dividend distributions from a tax-exempt security taxed?
they are tax exempt
How are REIT dividends taxed? Are they taxed if the taxpayer did not receive the distribution?
They are taxed as long term capital gains no matter what the holding period is. They are taxed even if not received.
What is a capital gain dividend? How are they taxed?
A distribution of capital gains realized from the sale of investments in the fund. Tax as LT cap gains not matter the holding period
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.
Undistributed capital gains credited to a taxpayer’s account must be included in GI in the year credited.
- Taxpayer declares a capital gain of $2500
- TP takes a $500 credit on investment income
- Taxpayer increases her basis by $2000 (2500-500)
