Why the Tax Impact on Dividend Income Is Important
By Saghir Aslam
Rawalpindi, Pakistan
(The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the Ummah will benefit from this effort through greater financial empowerment, enabling the community to live in security and dignity and fulfill their religious and moral obligations towards charitable activities)
Dividend-paying investment may help meet your portfolio needs-and dividend income and its tax implications are important to you as an investor.
Tax on dividends: Qualified” verses “non-qualified”
Investors tend to find some dividend-paying stocks and mutual funds attractive because their total returns includes both the dividend and may market price appreciation. Considering taxes and divined income, seasoned investors have learn the special qualified dividend treatment may increase their after tax return when compared to nonqualified dividends .if you’re an investor whose income exceeds certain thresholds, you’ll need to keep an eye on the additional 3.8% Medicare surcharges . Under current legislation, single taxpayers with the Modified Adjusted Gross Income (MAGI) of $200, 00 and married taxpayers filling jointly with an MAGI in excess of $ 250,000 are subject to an additional 3.8% Medicare surcharges on net investment income (which includes all taxable dividends).
For tax purpose, it’s important to know dividends are considered either “qualified” or “nonqualified”. Qualified dividends are taxed using long-term capital gain rates of 0%, 15% OOR 20% depending on your level of taxable income.
Nonqualified dividends are taxed at the same rates as ordinary income (currently at 37% maximum).
What’s a “qualified” dividend?
Qualified dividends are paid to investors in common and preferred stock of U.S. corporations or by entities incorporated in a U.S. possession. Dividends passed through by mutual funds or other regulated investment companies can be qualified or nonqualified, depending on the underlying securities held by the fund.
If a fund receives a qualified dividend, the dividend will maintain its qualified status when passed through to shareholders. Distributors form the partnerships and real estate investment trust typically are not characterized as qualified dividends. Also, qualified dividends do not include distributions from preferred debt.
Dividend paid by certain foreign corporations may also be qualified .Example includes:
- Shares represented by a publicly traded American Depositary Receipt (ADR).
- Shares that are otherwise readily tradable on an established on U.S. securities market.
- Corporations incorporated in a country having an income-tax treaty with the United States containing an exchange of information program approved by the U.S. treasury.
Keep in mind that the foreign corporate divided may remain subject to foreign tax withholding. It’s critical to obtain proper tax classification of an investment to determine whether the dividend is qualified.
(Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. Mr Aslam does not endorse or recommend any broker, brokerage firm, or any investment at all, nor does he suggest that anyone will earn a profit when or if they purchase stocks, bonds or any other investments. All stocks or investment vehicles mentioned are for illustrative purposes only. Mr Aslam is not an attorney, accountant, real estate broker, stockbroker, investment advisor, or certified financial planner. Mr Aslam does not have anything for sale.)
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