investment strategy

Investing & Trading Dividends

In this short white paper, I will try to answer some of the most common questions I get from both traders (holding some long term positions) and investors.  Most of these questions surround dividends.

What Are Dividends?

A dividend is a distribution of cash or property, made by a corporation to its shareholders out of accumulated or current earnings and profits.  Ordinary cash dividends, whether paid on common or preferred stock, are generally included in the shareholder’s gross income for the year in which they are actually received, regardless of the period for which they are paid.

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The Difference Between Qualified & Non-Qualified Income

“Qualified dividend income”  (dividends paid by domestic corporations and certain foreign corporations to shareholders) is taxed at the lower rates applicable to net capital gain.  The dividend is not taken into account in the capital gain and loss netting process used to compute your capital gains on your federal tax return.  The American Taxpayer Relief Act of 2012 (ATRA) increased the tax rate on qualified dividends and capital gains for certain higher income taxpayers.  The maximum rate is 20% for taxpayers in the 39.6% tax bracket, and a maximum of 15% for taxpayers in the 25, 28, 33, or 35% tax bracket.  For taxpayers, in the 15% & 10% tax bracket the tax rate on qualified dividend income tax is 0%.

“Non-qualifying dividends”  continue to be treated as ordinary income subject to ordinary income tax rates.

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Dividends Are Taxed & Reported On Tax Returns

If you own the stock, and it is held for you in street name by your broker, you should report, without itemization, the total amount of dividends received on securities held for you.  You get this information from the broker. If you had over $1,500 of taxable interest or ordinary dividends you will report them on Schedule B of your IRS Form 1040.

Stock Dividends

A stock dividend is a dividend paid in shares of stock of the distributing corporation to its shareholders with respect to its outstanding stock. Generally, a stock dividend is not taxable  There are some significant exceptions, so you should let your CPA rule on this one while doing your stock trading taxes. You will be taxed on this when you sell the shares.  At that time your basis on will be reallocated between the old and the new shares in proportion to the fair market values of each on the date of the distribution.  The holding period of the “new” stock received in a nontaxable stock dividend includes the holding period of the stock on which the dividend was paid.

Contact Traders Accounting for Questions About Dividends

I will grant you that the discussion above may create more questions than answers, as it is complicated.  If you have questions, do not hesitate to contact us at Traders Accounting for clarification.

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