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previous page Previous Page: Publication 17 - Your Federal Income Tax - Dividends and Other Corporate Distributions
next page Next Page: Publication 17 - Your Federal Income Tax - Capital Gain Distributions
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taxmap/pub17/p17-037.htm#en_us_publink100032741

Ordinary Dividends(p63)


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Ordinary (taxable) dividends are the most common type of distribution from a corporation. They are paid out of the earnings and profits of a corporation 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 tells you otherwise. Ordinary dividends will be shown in box 1a of the Form 1099-DIV you receive.
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Qualified Dividends(p63)


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Qualified dividends are the ordinary dividends that are 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.
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Holding period.(p63)


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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 will not 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.
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Exception for preferred stock.(p63)
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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.
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Example 1.(p63)

You bought 5,000 shares of XYZ Corp. common stock on July 1, 2008. XYZ Corp. paid a cash dividend of 10 cents per share. The ex-dividend date was July 9, 2008. 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 4, 2008. You held your shares of XYZ Corp. for only 34 days of the 121-day period (from July 2, 2008, through August 4, 2008). The 121-day period began on May 10, 2008 (60 days before the ex-dividend date), and ended on September 7, 2008. You have no qualified dividends from XYZ Corp. because you held the XYZ stock for less than 61 days.
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Example 2.(p63)

Assume the same facts as in Example 1 except that you bought the stock on July 8, 2008 (the day before the ex-dividend date), and you sold the stock on September 9, 2008. You held the stock for 63 days (from July 9, 2008, through September 9, 2008). 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 9, 2008, through September 7, 2008).
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Example 3.(p63)

You bought 10,000 shares of ABC Mutual Fund common stock on July 1, 2008. ABC Mutual Fund paid a cash dividend of 10 cents a share. The ex-dividend date was July 9, 2008. 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 4, 2008. You have no qualified dividends from ABC Mutual Fund because you held the ABC Mutual Fund stock for less than 61 days.
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Holding period reduced where risk of loss is diminished.(p63)
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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.
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Qualified foreign corporation.(p63)


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Qualified foreign corporation

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, seeTable 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.
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Exception.(p63)
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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.
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Readily tradable stock.(p63)
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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) 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.
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Dividends that are not qualified dividends.(p63)


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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.

Table 8-1. Income Tax Treaties

Income tax treaties the United States has with the following countries satisfy requirement (2) under Qualified foreign corporation.
AustraliaIndonesiaRomania
AustriaIrelandRussian
Bangladesh1Israel Federation
Barbados2ItalySlovak
BelgiumJamaica Republic
CanadaJapanSlovenia
ChinaKazakhstanSouth Africa
CyprusKoreaSpain
CzechLatviaSri Lanka3
 RepublicLithuaniaSweden
DenmarkLuxembourgSwitzerland
EgyptMexicoThailand
EstoniaMoroccoTrinidad and
FinlandNetherlands Tobago
FranceNew ZealandTunisia
GermanyNorwayTurkey
GreecePakistanUkraine
HungaryPhilippinesUnited
IcelandPoland Kingdom
IndiaPortugalVenezuela
1Effective for dividends paid after August 6, 2006.
2Effective for dividends paid after December 19, 2004.
3Effective for dividends paid after July 11, 2004.
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Dividends Used to Buy More Stock(p64)


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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. If you are a member of this type of plan and 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.
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Money Market Funds(p64)


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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.
previous pagePrevious Page: Publication 17 - Your Federal Income Tax - Dividends and Other Corporate Distributions
next pageNext Page: Publication 17 - Your Federal Income Tax - Capital Gain Distributions
 Use previous pagenext page to find additional occurrences of topic items.Index for this Publication