U.S. Tax Preparation Worldwide James Maertin CPA
Tax Guide
Capital Gains, Interest and Dividends
Education Credits, Scholarships
Social Security, Medicare, Self Employment Tax
Tax Deadlines, Extensions, Late Payments, Estimated Tax
Tax Resident, Nonresident, Dual Status
Interest and Dividends
Interest
Residents (Form 1040):
Interest (U.S. and foreign source) is taxed as ordinary income. Therefore, the nominal tax rate will be whatever tax bracket you are in (10%, 12%, 22%, 24%, 32%, 35% or 37%).
Nonresidents (Form 1040NR):
Interest (U.S. bank and portfolio interest) that is not effectively connected with a U.S. trade or business is generally exempt from taxation. See IRS Publication 519.
Some types of interest (e.g., interest from the IRS), are taxable at a flat 30% or lower treaty rate. Interest that is effectively connected with a U.S. trade or business is taxable at normal graduated rates.
Dividends
Dividends are distributions of property a corporation may pay
you if you own stock in that corporation. Corporations pay most dividends in
cash. However, they may also pay them as stock of another corporation or as
any other property. A shareholder of a corporation
may be deemed to receive a dividend if the corporation pays the debt of its
shareholder, the shareholder receives services from the corporation, or the
shareholder is allowed the use of the corporation's property. Additionally,
a shareholder that provides services to a corporation may be deemed to
receive a dividend if the corporation pays the shareholder service-provider
in excess of what it would pay a third party for the same services. A
shareholder may also receive distributions such as additional stock or stock
rights in the distributing corporation; such distributions may or may not
qualify as dividends.
Source: IRS
Residents (Form 1040):
Ordinary dividends: Ordinary dividends are the most common type of distribution from a corporation or a mutual fund. They are paid out of earnings and profits and are ordinary income to you. This means they are not capital gains. You can assume that any dividend you receive on common or preferred stock is an ordinary dividend unless the paying corporation or mutual fund tells you otherwise. Ordinary dividends will be shown in box 1a of the Form 1099-DIV you receive. For 2024, the tax rate will be whatever tax bracket you are in (10%, 12%, 22%, 24%, 32%, 35% or 37%). In addition, they may be subject to net investment income tax (NIIT) of 3.8% if income is above certain amounts.
Qualified dividends: Qualified dividends are the ordinary dividends subject to the same 0%, 15%, or 20% maximum tax rate that applies to long term capital gains (see table below). In addition, they may be subject to net investment income tax (NIIT) of 3.8% if income is above certain amounts. If you received Form 1099-DIV, they will be reported in box 1b.
2024 qualified dividend (and long term capital gain) tax brackets
Qualified Dividend Tax Rate |
Single | Married Joint | Married Separate | Head of Household |
0% |
$0 - $47,025 |
$0 - $94,050 |
$0 - $47,025 |
$0 - $63,000 |
15% |
$47,026 - $518,900 |
$94,051 - $583,750 |
$47,026 to $291,850 |
$63,001 - $551,350 |
20% |
$581,901 or more |
$583,751 or more |
$291,851 or more |
$551,351 or more |
For example, a married couple pays no tax on their qualified dividend income if their total taxable income is no more than $94,050. They'll pay 15% on qualified dividend income if their taxable income is $94,051 to $583,750. If their taxable income is over $583,751, they'll pay 20%. Taxable income is line 15 on 2024 Form 1040.
The dividends must have been paid by a U.S. corporation or a qualified foreign corporation (see below).
The dividends are not of the type listed under Dividends that are not qualified dividends (see below).
You meet the holding period.
(1) Holding period.
You must have held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. The ex-dividend date is the first date following the declaration of a dividend on which the buyer of a stock is not entitled to receive the next dividend payment. When counting the number of days you held the stock, include the day you disposed of the stock, but not the day you acquired it. See the examples below.
Exception for preferred stock.
In the case of preferred stock, you must have held the stock more than 90 days during the 181-day period that begins 90 days before the ex-dividend date if the dividends are due to periods totaling more than 366 days. If the preferred dividends are due to periods totaling less than 367 days, the holding period in the preceding paragraph applies.
Example 1.
You bought 5,000 shares of XYZ Corp. common stock on July 5, 2024. XYZ Corp. paid a cash dividend of 10 cents per share. The ex-dividend date was July 12, 2024. 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, 2024. You held your shares of XYZ Corp. for only 34 days of the 121-day period (from July 6, 2024, through August 8, 2024). The 121-day period began on May 13, 2024 (60 days before the ex-dividend date), and ended on September 10, 2024. You have no qualified dividends from XYZ Corp. because you held the XYZ stock for less than 61 days.
Example 2.
Assume the same facts as in Example 1 except that you bought the stock on July 11, 2024 (the day before the ex-dividend date), and you sold the stock on September 13, 2024. You held the stock for 63 days (from July 12, 2024, through September 13, 2024). 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, 2024, through September 13, 2024).
Example 3.
You bought 10,000 shares of ABC Mutual Fund common stock on July 5, 2024. ABC Mutual Fund paid a cash dividend of 10 cents per share. The ex-dividend date was July 12, 2024. 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, 2024. You have no qualified dividends from ABC Mutual Fund because you held the ABC Mutual Fund stock for less than 61 days.
Holding period reduced where risk of loss is diminished.
When determining whether you met the minimum holding period discussed earlier, you cannot count any day during which you meet any of the following conditions.You had an option to sell, were under a contractual obligation to sell, or had made (and not closed) a short sale of substantially identical stock or securities.
You were grantor (writer) of an option to buy substantially identical stock or securities.
Your risk of loss is diminished by holding one or more other positions in substantially similar or related property.
(2) Qualified foreign corporation.
A foreign corporation is a qualified foreign corporation if it meets any of the following conditions.
The corporation is incorporated in a U.S. possession.
The corporation is eligible for the benefits of a comprehensive income tax treaty with the United States that the Department of the Treasury determines is satisfactory for this purpose and that includes an exchange of information program. For a list of those treaties, see Table 1-3.
The corporation does not meet (1) or (2) above, but the stock for which the dividend is paid is readily tradable on an established securities market in the United States. See Readily tradable stock , later.
Exception.
A corporation is not a qualified foreign corporation if it is a passive foreign investment company during its tax year in which the dividends are paid or during its previous tax year.
Controlled foreign corporation (CFC).
Dividends paid out of a CFC's earnings and profits that were not previously taxed are qualified dividends if the CFC is otherwise a qualified foreign corporation and the other requirements in this discussion are met. Certain dividends paid by a CFC that would be treated as a passive foreign investment company but for section 1297(d) of the Internal Revenue Code may be treated as qualified dividends. For more information, see Notice 2004-70, which can be found at www.IRS.gov/irb/2004-44_IRB/ar09.html.
Readily tradable stock.
Any stock or American depositary receipt in respect of that stock is considered to satisfy requirement (3) under Qualified foreign corporation , if it is listed on a national securities exchange that is registered under section 6 of the Securities Exchange Act of 1934 or on the Nasdaq Stock Market. For a list of the exchanges that meet these requirements, see www.sec.gov/divisions/marketreg/mrexchanges.shtml.
Table 1-3. Income Tax Treaties
Income tax treaties that the United States has with the following countries satisfy requirement (2) under Qualified foreign corporation . | ||
Australia | Indonesia | Romania |
Austria | Ireland | Russian |
Bangladesh | Israel | Federation |
Barbados | Italy | Slovak |
Belgium | Jamaica | Republic |
Bulgaria | Japan | Slovenia |
Canada | Kazakhstan | South Africa |
China | Korea | Spain |
Cyprus | Latvia | Sri Lanka |
Czech | Lithuania | Sweden |
Republic | Luxembourg | Switzerland |
Denmark | Malta | Thailand |
Egypt | Mexico | Trinidad and |
Estonia | Morocco | Tobago |
Finland | Netherlands | Tunisia |
France | New Zealand | Turkey |
Germany | Norway | Ukraine |
Greece | Pakistan | United |
Hungary | Philippines | Kingdom |
Iceland | Poland | Venezuela |
India | Portugal | |
(3) Dividends that are not qualified dividends.
The following dividends are not qualified dividends. They are not qualified dividends even if they are shown in box 1b of Form 1099-DIV.
Capital gain distributions.
Dividends paid on deposits with mutual savings banks, cooperative banks, credit unions, U.S. building and loan associations, U.S. savings and loan associations, federal savings and loan associations, and similar financial institutions. Report these amounts as interest income.
Dividends from a corporation that is a tax-exempt organization or farmer's cooperative during the corporation's tax year in which the dividends were paid or during the corporation's previous tax year.
Dividends paid by a corporation on employer securities held on the date of record by an employee stock ownership plan (ESOP) maintained by that corporation.
Dividends on any share of stock to the extent you are obligated (whether under a short sale or otherwise) to make related payments for positions in substantially similar or related property.
Payments in lieu of dividends, but only if you know or have reason to know the payments are not qualified dividends.
Payments shown on Form 1099-DIV, box 1b, from a foreign corporation to the extent you know or have reason to know the payments are not qualified dividends.
Nonresidents (Form 1040NR):
For U.S. nonresidents filing Form 1040NR, Dividends form U.S. corporations are usually taxable at a 30%
flat tax rate, unless a treaty between the U.S. and your home country reduces or
eliminates the tax.
Net Investment Income Tax
Individual taxpayers are liable for a 3.8% net investment income tax on the lesser of their net investment income, or the amount by which their modified adjusted gross income exceeds the statutory threshold amount based on their filing status.
The statutory threshold amounts are:
In general, net investment income includes, but is not limited to: interest, dividends, capital gains, rental and royalty income, and non-qualified annuities.