Taxes Flashcards
What is a cash dividend?
Income received from an equity investment
What are three examples of packaged products that receive dividends?
- mutual funds
- closed end funds
- ETFs
How are dividends taxed in comparison to other forms of investment income?
They are taxed less than other forms like bond interest
What 5 things determine an investor’s annual taxable income rate?
- salary
- wages
- commissions
- bonuses
- royalties
What’s the difference between qualified an unqualified dividends?
Qualified tax dividends are taxable at lower rates than non-qualified
What are the three brackets of qualified divident tax rates
- 0 percent
- 15 percent
20 percent
What two requirements must be met to have qualified tax dividends?
- distributed by a US corporation or qualfied foreign corporation
- investor must meet a specific unhedged holding period
What is required to be consired a qualified foreign corporation?
ONE of three requirements:
- Incorporate in a US posession including territories
- subject to a US tax treaty
- dividend=paying security trades on an established stock exchange
What does meeting an unhedged requirement mean?
Not having any insurance or option hedges that would prevent investor from experiencing a loss
What dividend tax rate should you assume on the SIE if none is given?
15 percent
What are unqualified dividends taxed at?
The individual’s federal marginal income tax bracket
What is a marginal tax bracket?
tax bracket applied to the last dollar earned
What determines the tax rate of unqualified dividends ?
Income tax rate
What dividend rate do mutual funds, common stocks, and preferred stocks pay?
Qualified
What specific dividend-paying investment never pays qualified dividends?
Real estate investement trust REIT
What is the logic behind REITs always being non-qualified?
With a higher income tax rate, REITs must offer higher rates of returns to encourage investors to purcahse units
What tax form are dividends reported on?
1099 DIV
At what frequency are dividends reported?
annually
What tax year will dividends show up in?
The year the dividend was paid, not declared
When are new shares taxable?
Not until they are sold
What type of dividend do 1099 DIV not report?
stock dividends
What taxes are US Gov debt subject to?
Federal taxes only
What taxes are martgage backed securities subject to?
federal, state, and local
What taxes are municipal debt subject to?
State and local taxes
When are municipal debt tax free?
If resident or territory bond
What taxes are corporate debt subject to?
federal, state, and local
Define marginal tax bracket
tax bracket applied to the next dollar received
What tax form is interest reported on?
1099 INT
What is the tax rate for interest equal to?
federal marginal income tax bracket
When is a capital gain realized?
When customer sells security at a higher price than its original cost
What does the cost basis represent?
Overall amount paid to buy the security including commission
What do sales proceeds represent?
Overall amount received to sell a security minus commision
What counts as long-term capital gains
securities held for more than 12 months not equal to 12 months
In what manner are long-term capital gains taxed?
Same as qualified dividends
0%, 15%, or 20%
What should you assume is tax rate on qualified dividends or long-term capital gains?
15%
What qualifies a short-term capital gain?
Made on securities held for one year or less
At what rate are short term capital gains taxed?
At investor’s income tax bracket
What is the marginal tax bracket?
The tax bracket applied to the last dollar earned
What form are capital gains reported on?
1099 B
What are two tax benefits to the deceased?
- cost basis is stepped up
- Holding period is automatically long-term
To when is the new cost basis adjusted when someone dies?
To the value on the day of the original owner’s death
Formula for cost basis?
purchase price. + commission
