May 15, 2016: Qualified Dividends
Qualified dividends are generally dividends from shares in domestic corporations and certain qualified foreign corporations which you have held for at least a specified minimum period of time, known as a holding period. Another requirement is that the shares be unhedged; that is, there were no puts, calls, or short sales associated with the shares during the holding period.
These dividends are taxable federally at preferred rates which depend on the investor’s modified adjusted gross income (MAGI). The tax rate for qualified dividends in 2016 is 0% when MAGI is less than $37,650, 15% when MAGI is between $37,650 and $415,050 and 20% when MAGI is over $415,050.
Qualified dividends are generally dividends from shares in domestic corporations and certain qualified foreign corporations which you have held for at least a specified minimum period of time, known as a holding period. Another requirement is that the shares be unhedged; that is, there were no puts, calls, or short sales associated with the shares during the holding period.
These dividends are taxable federally at preferred rates which depend on the investor’s modified adjusted gross income (MAGI). The tax rate for qualified dividends in 2016 is 0% when MAGI is less than $37,650, 15% when MAGI is between $37,650 and $415,050 and 20% when MAGI is over $415,050.
Qualified dividend holding period: Although the holding period requirement is the same whether you received a dividend for shares you hold directly or in a mutual fund during the tax year, how you determine the holding period may vary, as outlined below.
Mutual funds: When counting the number of days held, include the day the fund was disposed of, but not the day it was acquired. In addition, all of the following requirements must be met:
Stock: When counting the number of days held, include the day the stock was disposed of, but not the day it was acquired. In addition, all of the following requirements must be met:
Example of determining holding period: Consider this hypothetical situation in which you have dividends reported on Form 1099-DIV as qualified from shares in XYZ fund. You purchased 10,000 shares of XYZ fund on April 27 of the tax year. You sold 2,000 of those shares on June 15, but continue to hold (unhedged at all times) the remaining 8,000 shares. The ex-dividend date for XYZ fund was May 2.
Therefore, during the 121-day window, you held 2,000 shares for 49 days (from April 28 through June 15) and 8,000 shares for at least 61 days (from April 28 through July 1).
The dividend income from the 2,000 shares held 49 days would not be qualified dividend income. The dividend income from the 8,000 shares held at least 61 days should be qualified dividend income.
Mutual funds: When counting the number of days held, include the day the fund was disposed of, but not the day it was acquired. In addition, all of the following requirements must be met:
- The fund must have held the security unhedged for at least 61 days out of the 121-day period that began 60 days before the security’s ex-dividend date. (The ex-dividend date is the date after the dividend has been paid and processed and any new buyers would be eligible for future dividends.)
- For certain preferred stock, the security must be held for 91 days out of the 181-day period, beginning 90 days before the ex-dividend date. The amount received by the fund from that dividend-generating security must have been subsequently distributed to you.
- You must have held the applicable share of the fund for at least 61 days out of the 121-day period that began 60 days before the fund’s ex-dividend date.
Stock: When counting the number of days held, include the day the stock was disposed of, but not the day it was acquired. In addition, all of the following requirements must be met:
- You must have held those shares of stock unhedged for at least 61 days out of the 121-day period that began 60 days before the ex-dividend date.
- For certain preferred stock, the security must be held for 91 days out of the 181-day period beginning 90 days before the ex-dividend date.
Example of determining holding period: Consider this hypothetical situation in which you have dividends reported on Form 1099-DIV as qualified from shares in XYZ fund. You purchased 10,000 shares of XYZ fund on April 27 of the tax year. You sold 2,000 of those shares on June 15, but continue to hold (unhedged at all times) the remaining 8,000 shares. The ex-dividend date for XYZ fund was May 2.
Therefore, during the 121-day window, you held 2,000 shares for 49 days (from April 28 through June 15) and 8,000 shares for at least 61 days (from April 28 through July 1).
The dividend income from the 2,000 shares held 49 days would not be qualified dividend income. The dividend income from the 8,000 shares held at least 61 days should be qualified dividend income.
