Tax Treatment of Dividend Income

            For tax purposes, dividends are considered either “qualified” or “non qualified.” 


            Qualified dividends are those which stem from the stocks/Mutual funds which fulfill the holding period (usually 61 - 121 days for shares) and are:

            Tax-free for those in the 10% and 15% brackets to the extent qualified dividend income remains within those brackets

            Taxed at a 15% rate for those in the 25% up to 35% tax brackets

            Taxed at a 20% rate for higher income taxpayers whose income surpasses the 35% tax bracket


            Non qualified dividends are:

            Taxed at the same rates as ordinary income (currently a 39.6% maximum).



            You must report all taxable dividends even if you do not receive a Form 1099-DIV or Schedule K-1.


            Certain dividends require a different treatment; say if you receive dividends through a partnership, an estate, a trust, or a S corporation, you should receive a Schedule K-1 from that entity indicating the amount of dividends taxable to you. You must also report any undistributed capital gain that mutual funds or REITs have designated to you in a written notice.


            Although dividends and long-term capital gains are taxed at the same rates, this does not mean that capital losses can be used to offset dividends. However, if you have a net capital loss after offsetting all capital gains, up to $3,000 per year of capital loss may offset ordinary income which may include dividend income.


            Lets take an example to understand this better


            You have 10,000 shares of one particular company of which 8,000 shares are held for 61 days (qualified holding period) and the balance 2,000 are held for 41 days.


            A dividend of 0.10 is declared and you received $1,000 as Dividend income via Form 1099DIV. This is how you dividends will be categorized


            8,000 X 0.10 = $800 is qualified dividend income


            2,000 X 0.10 = $200 is non-qualified or regular dividend income

             

            Updated: 23 Dec 2014 05:46 PM
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