Dividends and Other Corporate Distributions
When should a taxpayer report any additional non-dividend distribution as a capital gain?
When the stock basis reaches zero
Would a taxpayer have to report dividends as income if the corporation have dividend reinvestment plans that allow for the purchase of more stock in the company instead of receiving the dividends in cash?
Yes, taxpayers who are members of this type of plan must still report the dividends as income
XYZ Corporation had 1,000 shares of common stock outstanding which were issued for $25 per share. The owners of half of these shares are given a stock dividend of one share of preferred stock for every 20 shares of common stock held (a total of 25 shares). Owners of the other half are given one share of common stock for every 4 shares of common stock held (a total of 125 shares). The fair market value of the preferred stock was $75 per share. The fair value of the common stock was $15 per share. With respect to this dividend, what is the combined total that all shareholders include in gross income for tax purposes?
$3750 Normally, stock dividends are not taxable. However, in certain situations, they are taxable based on value. For example, if the owner can choose cash or stock and chooses the stock, it is still taxable. In addition, if some owners are given common stock and some are given preferred stock, the value is taxable. Here, for the preferred stock, 25 shares at $75 FMV per share are worth $1,875 and for the common stock, 125 shares at $15 FMV per share are also worth $1,875 so that the total value distributed is $3,750.
During the current year, Jack sold 500 shares of stock. On December 31 of the current year, he also received a capital gain distribution of $750 from his mutual fund. He owned his mutual fund shares since June 30 of the current year. How should Jack report the capital gain distribution on his current year tax return?
$750 long-term capital gain All capital gain distributions (also called capital gain dividends) are treated as long-term capital gains no matter how long you have held the investment.
What is the maximum rate of tax on qualified dividends if the dividend would be taxed between 15 and 37% rate?
15%
How are dividends classified?
A dividend is classified either as ordinary or qualified. Whereas ordinary dividends are taxable as ordinary income, qualified dividends that meet certain requirements are taxed at the same low rates that apply to long-term capital gains
Which of the following is NOT taxable as dividend income? -Cash dividend on life insurance policy -Cash dividend on stock in ABC Corporation -Dividend on mutual fund which was reinvested in more stock and not sent to the taxpayer -Dividend taken in new shares of stock where owner had choice of taking cash
Cash dividend on life insurance policy Cash dividends from corporations and mutual funds are taxable even if they are reinvested. Dividends in a company's own stock are usually tax-free unless the owner also had the option of taking cash instead. Dividends on a life insurance policy are not taxable; they are treated as a reduction in the expense of the policy.
T/F - A taxpayer only has to record a dividend only if it's paid out.
False. A taxpayer that is a partner in a partnership or a beneficiary of an estate or trust, may be required to report a share of any dividends received by the entity, whether or not the dividend is paid out
T/F - If a dividend reinvestment plan allows the purchase of more stock at a price less than its fair market value, the taxpayer only has to report the price they paid of the additional stock as dividend income on the the dividend payment date.
False. If the plan allows the purchase of more stock at a price less than its fair market value, the taxpayer must report the fair market value of the additional stock as dividend income on the dividend payment date.
What form does a shareholder receive that reflects their share of undistributed long-term capital gains?
Form 2439
How would a share of an entity's dividend be reported?
Generally on a Schedule K1
What is the difference between ordinary and qualified dividends?
Qualified dividends also are included in the ordinary dividend total, but qualified dividends are eligible for a lower tax rate than other ordinary income
Qualified dividends are subject to one of three maximum tax rates. Which three tax rates are used for qualified dividends?
Qualified dividends are subject to the same 0%, 15% or 20% maximum tax rate that applies to net capital gain. Qualified dividends are subject to the 20% tax rate if the regular tax rate that would apply is 37%.
Arena, Inc. decided to distribute shares of its own stock to its employees at year-end as a reward for a profitable year. Each employee was to receive 10 shares with a fair market value of $100 per share. Employees were offered a choice of cash or the stock dividend. What is the tax effect on the employees of this distribution?
$1,000 taxable income to each employee Distributions of stock dividends and stock rights are taxable if employees have the choice to receive cash or other property instead of stock or stock rights. Since the employees were offered a choice of cash or the stock dividend, $1,000 is taxable income to each employee.
Joan and Jim had income from investments in 20X1. They also earned a substantial amount of wages. Most of their dividends and interest are reinvested. The reinvested income included $2,000 in dividends from mutual funds, interest from a savings account of $3,000, and interest from certificates of deposit of $4,000. Dividends from stocks of $5,000 were received and spent. Interest of $1,000 earned in 20X1 on a loan to a friend was not received until the following year. How much interest and dividend income must Joan and Jim report on their tax return for 20X1?
$14,000 The mutual fund dividends, the savings account interest, the CD interest and the stock dividend amounts (which combined total $14,000) are all taxable when constructively received, no matter what they did with the proceeds. The $1,000 in accrued interest on the loan to a friend was not constructively received in 20X1, so it does not need to be reported on the 20X1 tax return.
What is the maximum rate of tax on qualified dividends if the dividend would be taxed at a 37% rate?
20%
How would a taxpayer calculate the holding period of stock?
Include the day the stock was disposed of, but not the day acquired. The ex-dividend date is the first date following the declaration of a dividend on which the buyer of a stock will not receive the next dividend payment. Instead, the seller will get the dividend.
Is a non-dividend distribution taxable?
It is NOT taxable until the taxpayer fully recovers their basis
If a taxpayer received ordinary dividends, how is the dividend taxed?
It is taxed as ordinary income not capital gains.
How does a corporation pay out ordinary dividends?
Out if its earnings and profits
What form would you report undistributed capital gains as a long-term capital gain?
Schedule D
How would a taxpayer qualify for the maximum rate?
The dividends must be paid by a U.S. corporation or a qualified foreign corporation and The taxpayer must hold the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date.
What determines whether the taxpayer should report a non-dividend distribution as a long-term or short-term capital gain?
The holding period
What is the maximum rate of tax on qualified dividends if the dividend would be taxed below the 15% rate?
0%
Distributions of stock dividends an stock rights are taxable if ANY of the following 5 things apply:
1. Shareholders have the choice to receive cash or other property instead of stock or stock rights 2. The distribution gives cash or other property to some shareholders and an increase in the percentage interest in the corporation's assets or earnings and profits to other shareholders 3. The distribution is in convertible preferred stock, resulting in a change of ownership. 4. The distribution is preferred stock for some common shareholders and common stock to others. 5. The distribution is on preferred stock.
Are common or preferred stocks considered qualified or ordinary dividends?
A taxpayer can assume that any dividend received on common or preferred stock is an ordinary dividend unless the paying corporation or mutual fund tells them otherwise. Ordinary dividends are the most common type of distribution from a corporation, and as the name implies, shareholders generally report such payments as ordinary income.
What is a dividend? Is it taxable?
A taxpayer that receives a distribution from a corporation may have taxable income if the distribution is classified as a dividend. A dividend is a distribution of property paid by the corporation to its stockholders. A dividend is the most common type of distribution from a corporation. A dividend is paid out of the earnings and profits of the corporation.
What is a non-dividend distribution?
Aka - return of capital. It's a distribution that is NOT a payment from the earnings and profits of a corporation.
A distribution of stock, or rights to acquire stock in the distributing corporation, is not included in the recipient's gross income unless: -Shareholders have the choice to receive cash or other property instead of stock or stock rights -The distribution gives cash or other property to some shareholders and an increase in the percentage interest in the corporation's assets or earnings and profits to other shareholders -The distribution is preferred stock for some common shareholders and common stock to other -All of the above
All of the above Distributions by a corporation of its own stock or stock rights (also known as stock options) are generally not taxable, and a holder of such options need not report them on a return. Distributions of stock dividends and stock rights are taxable if any of the following apply: Shareholders have the choice to receive cash or other property instead of stock or stock rights. The distribution gives cash or other property to some shareholders and an increase in the percentage interest in the corporation's assets or earnings and profits to other shareholders. The distribution is in convertible preferred stock, resulting in a change of ownership. The distribution is preferred stock for some common shareholders and common stock to others. The distribution is on preferred stock.
How should the taxpayer treat their share or gain?
As a distribution, even if not actually received
Matthew Kennedy received a dividend from Mayflow Corporation during the current year. Matthew has elected to use Mayflow's dividend reinvestment plan to purchase additional stock at FMV with the dividend received. The dividend was $1,500 and the FMV of the stock purchased was $1,475. A $25 service charge was applied to this transaction. What must Matthew report as dividend income on his current year tax return?
Because Matthew is participating in a dividend reinvestment plan, he must report as dividend income, the fair market value of the stocks as of the day the dividend (along with any related fees paid for purchasing the stocks if paid out of the dividend declared by the company) was received. All $1,500 of the purchase price and service charges were paid out under the dividend reinvestment plan and all $1,500 is reportable as dividend income.
Is a non-dividend distribution a dividend?
No, its is a return of an investment in the stock of the company and reduces the basis of the stock
Would a taxpayer report capital gain distributions as dividends?
No. Capital gain distributions reflect income paid or credited to the taxpayer's account by mutual funds (or other regulated investment companies) and real estate investment trusts (REITs). A taxpayer must report capital gain distributions as long-term capital gains (not dividends) regardless of how long the taxpayer has owned the shares of the mutual fund or REIT. Some mutual funds and REITs keep their long-term capital gains and pay tax on them
Is a money market fund the same as a bank money market account?
No. Money market funds are a type of mutual fund, not to be confused with bank money market accounts that pay interest.
The following statements about dividends received from a dividend reinvestment plan are correct EXCEPT: -Reinvested dividends are not taxable if not removed from the plan -Reinvested dividends are taxable in the year paid -Reinvested dividends are taxable and are added to the basis of the stock or mutual fund -Reinvested dividends are treated as ordinary or qualified dividends
Reinvested dividends are not taxable if not removed from the plan Dividends are taxable as income when received. The fact that they are re-invested does not matter. The question contains the word EXCEPT, which is intended to trick you. All are correct EXCEPT implies that the answer is the only one that is FALSE. Don't fall for this trick.
During the current year, Amy bought shares in the Oppenheimer Mutual Fund for $250. She received a capital gain distribution, also known as a capital gain dividend, of $90 reported on Form 1099-DIV. How should Amy report the capital gain distribution on her tax return?
Report $90 as long-term capital gain
Martha owned 1,000 shares of common stock in XYZ Corporation for which she paid $37 per share. The company distributed a 5% dividend of common stock to all holders of common stock. The fair market value of the stock on the date of distribution was $63. With respect to this dividend, what amount must be included in Martha's gross income?
Stock dividends issued on common stock are normally not taxable. Instead, the cost of the original shares must be spread over all the shares (old and new) because that is the taxpayer's actual cost. The gain or loss on the stock will be included on the tax return when the stock is eventually sold. There is an exception, though, to this handling. Stock dividends are taxable if the taxpayer has the right to choose cash instead of the stock or the dividend is on preferred stock. The former exception does not seem to apply in this situation and the latter clearly does not apply.
You bought 5,000 shares of XYZ Corp. common stock on July 11. XYZ Corp. paid a cash dividend of 10 cents per share. The ex-dividend date was July 12. Your Form 1099-DIV from XYZ Corp. shows $500 in box 1a (ordinary dividends) and in box 1b (qualified dividends). However, you sold the 5,000 shares on September 13 of the same year. You held your shares of XYZ Corp. for only 63 days of the 121-day period (from July 12, through Sept 13). The 121-day period began on May 13 (60 days before the ex-dividend date) and ended on September 10. Are there any qualified dividends?
The $500 of qualified dividends shown in box 1b of your Form 1099-DIV are all qualified dividends because you held the stock for 61 days of the 121-day period (from July 12, through September 13).
What is the payer of the dividend required to do?
The payer of the dividend is required to correctly identify each type and amount of dividend and report to the taxpayer on Form 1099-DIV for distributions of at least $10
J. R. Jackson received cash dividends of $3,000 this year. The tax information provided by the company indicated that these were qualified dividends. Which of the following statements is true?
These dividends are taxed at the lower rate that is applicable for net long-term capital gains. Qualified dividends are those dividends collected from a U.S. domestic corporation or a qualified foreign corporation. To encourage investments in these companies, the dividends are taxed at the same reduced rate that applies to long-term capital gains.
T/F - Generally, a taxpayer would not need to report on their tax return distributions by a corporation of its own stock or stock rights (stock options)
True. Distributions by a corporation of its own stock or stock rights (also known as "stock options") are generally not taxable, and a holder of such options need not report them on a return
Would a taxpayer need to report dividend income from a money market fund?
Yes, a taxpayer reports amounts received from money market funds as dividend income
Can a taxpayer apply for a refund or credit of any payment made?
Yes, by including the amount in the payments section of their tax return and checking the appropriate box next to 2439
You bought 10,000 shares of ABC Mutual Fund common stock on July 5. ABC Mutual Fund paid a cash dividend of 10 cents per share. The ex-dividend date was July 12 of the same year. The ABC Mutual Fund advises you that the portion of the dividend eligible to be treated as qualified dividends equals 2 cents per share. Your Form 1099-DIV from ABC Mutual Fund shows total ordinary dividends of $1,000 and qualified dividends of $200. However, you sold the 10,000 shares on August 8. Are there any qualified dividends?
You have no qualified dividends from ABC Mutual Fund because you held the ABC Mutual Fund stock for less than 61 days.
You bought 5,000 shares of XYZ Corp. common stock on July 5. XYZ Corp. paid a cash dividend of 10 cents per share. The ex-dividend date was July 12. Your Form 1099-DIV from XYZ Corp. shows $500 in box 1a (ordinary dividends) and in box 1b (qualified dividends). However, you sold the 5,000 shares on August 8 of the same year. You held your shares of XYZ Corp. for only 34 days of the 121-day period (from July 6, through August 8). The 121-day period began on May 13 (60 days before the ex-dividend date) and ended on September 10. Are there any qualified dividends?
You have no qualified dividends from XYZ Corp. because you held the XYZ stock for less than 61 days.
