Ordinary Dividends(p63)

Ordinary (taxable) 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.

Qualified dividends are the ordinary dividends subject to the same 0% or 15% maximum tax rate that applies to net capital gain. They should be shown in box 1b of the Form 1099-DIV you receive.

Qualified dividends are subject to the 15% rate if the regular tax rate that would apply is 25% or higher. If the regular tax rate that would apply is lower than 25%, qualified dividends are subject to the 0% rate.

To qualify for the 0% or 15% maximum rate, all of the following requirements must be met.

• The dividends must have been paid by a U.S. corporation or a qualified foreign corporation. (See Qualified foreign corporation, later.)
• The dividends are not of the type listed later under Dividends that are not qualified dividends.
• You meet the holding period (discussed next).

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. Instead, the seller will get the dividend.

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 later.

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 previous paragraph applies.

You bought 5,000 shares of XYZ Corp. common stock on July 10, 2012. XYZ Corp. paid a cash dividend of 10 cents per share. The ex-dividend date was July 17, 2012. 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 13, 2012. You held your shares of XYZ Corp. for only 34 days of the 121-day period (from July 11, 2012, through August 13, 2012). The 121-day period began on May 18, 2012 (60 days before the ex-dividend date), and ended on September 15, 2012. You have no qualified dividends from XYZ Corp. because you held the XYZ stock for less than 61 days.

Assume the same facts as in Example 1 except that you bought the stock on July 16, 2012 (the day before the ex-dividend date), and you sold the stock on September 17, 2012. You held the stock for 63 days (from July 17, 2012, through September 17, 2012). 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 17, 2012, through September 15, 2012).

You bought 10,000 shares of ABC Mutual Fund common stock on July 10, 2012. ABC Mutual Fund paid a cash dividend of 10 cents a share. The ex-dividend date was July 17, 2012. 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 13, 2012. You have no qualified dividends from ABC Mutual Fund because you held the ABC Mutual Fund stock for less than 61 days.

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.

1. 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.
2. You were grantor (writer) of an option to buy substantially identical stock or securities.
3. Your risk of loss is diminished by holding one or more other positions in substantially similar or related property.

For information about how to apply condition (3), see Regulations section 1.246-5.

A foreign corporation is a qualified foreign corporation if it meets any of the following conditions.

1. The corporation is incorporated in a U.S. possession.
2. The corporation is eligible for the benefits of a comprehensive income tax treaty with the United States that the Treasury Department determines is satisfactory for this purpose and that includes an exchange of information program. For a list of those treaties, see Table 8-1.
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.

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.

Any stock (such as common, ordinary stock, or preferred stock) or an American depositary receipt in respect of that stock is considered to satisfy requirement (3), under Qualified foreign corporation, if it is listed on one of the following securities markets: the New York Stock Exchange, the NASDAQ Stock Market, the American Stock Exchange, the Boston Stock Exchange, the Cincinnati Stock Exchange, the Chicago Stock Exchange, the Philadelphia Stock Exchange, or the Pacific Exchange, Inc.

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 in 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.

Income tax treaties 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

The corporation in which you own stock may have a dividend reinvestment plan. This plan lets you choose to use your dividends to buy (through an agent) more shares of stock in the corporation instead of receiving the dividends in cash. Most mutual funds also permit shareholders to automatically reinvest distributions in more shares in the fund, instead of receiving cash. If you use your dividends to buy more stock at a price equal to its fair market value, you still must report the dividends as income.

If you are a member of a dividend reinvestment plan that lets you buy more stock at a price less than its fair market value, you must report as dividend income the fair market value of the additional stock on the dividend payment date.

You also must report as dividend income any service charge subtracted from your cash dividends before the dividends are used to buy the additional stock. But you may be able to deduct the service charge. See chapter 28 for more information about deducting expenses of producing income.

In some dividend reinvestment plans, you can invest more cash to buy shares of stock at a price less than fair market value. If you choose to do this, you must report as dividend income the difference between the cash you invest and the fair market value of the stock you buy. When figuring this amount, use the fair market value of the stock on the dividend payment date.

Report amounts you receive from money market funds as dividend income. Money market funds are a type of mutual fund and should not be confused with bank money market accounts that pay interest.