7502. How is a shareholder taxed on cash dividends he receives?Nuco Employeercline202014-06-26T15:55:00Z2014-06-26T15:55:00Z24562602Summit Business Media216305214Site Map/Investments/Stocks/Dividends/Dividends Paid In Cash or PropertyTaxFactsDefaultArticle2007-01-30T00:00:00Z120331002-00-tf2.xml1002.00;#1965;#0x010100C568DB52D9D0A14D9B2FDCC96666E9F2007948130EC3DB064584E219954237AF3900242457EFB8B24247815D688C526CD44D009C4E67E972694125ABDA91AC61F5E51FTax Facts 2How is a shareholder taxed on cash dividends he receives?
500.000000000000TaxFactsDefaultArticleSBMEDIA\moss-admin2010-01-14T22:01:46Z7502. How is a shareholder taxed on cash dividends received?Ordinary cash dividends, whether paid on common or preferred stock, are generally included in the shareholder’s gross income for the year in which they are actually received, regardless of the period for which they are paid. However, if there is an earlier constructive receipt, the shareholder will be taxed in the year in which the constructive receipt occurs.IRC Secs. 61, 301(c); Treas. Regs. §§1.61-9, 1.301-1(b). See Avery v. Comm., 292 U.S. 210 (1934). Thus, dividends that have accumulated prior to an individual’s purchase of cumulative preferred stock are taxed to the purchaser as dividends when actually or constructively received; accumulated dividends are not a return of a portion of purchase price and, thus, do not reduce tax basis.Rev. Rul. 56-211, 1956-1 CB 155.Under JGTRRA 2003, as extended by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (TRA 2010) and the American Taxpayer Relief Act of 2012 (“ATRA”), “qualified dividend income” (generally, dividends paid by domestic corporations and certain foreign corporations to shareholders, see Q 530) is taxed at the lower rates applicable to net capital gain (although dividends are not taken into account in the capital gain and loss netting process used to compute net capital gain). Nonqualifying dividends continue to be treated as ordinary income subject to ordinary income tax rates. ATRA increased the tax rate for qualified dividend income and capital gains for certain higher income taxpayers. For tax years beginning after 2012, the maximum rate on qualified dividend income is 20 percent for taxpayers in the 39.6 percent income tax bracket; that is, qualified dividend income that would otherwise be taxed at a 39.6 percent rate will be subject to only a 20 percent tax. For taxpayers in the 25, 28, 33, or 35 percent income tax brackets (see Q 553), the maximum rate on qualified dividend income is 15 percent. For taxpayers in the 15 and 10 percent income tax brackets, the tax rate on qualified dividend income was reduced to 5 percent in 2003 through 2007, and to 0 percent for tax years beginning after 2007.IRC Secs. 1(h)(11)., 1(h)(1), as amended by ATRA, Secs. 101, 102. ATRA eliminated the sunset provision that was included in prior legislation so that these tax rates will apply to qualified dividend income permanently (or until Congress again changes the rules). If stock is sold (or otherwise assigned) and a dividend is both declared and paid after the sale, the dividend is included in the purchaser’s, not the seller’s, income. When stock is sold (or assigned) after the dividend is declared but before payment, it is ordinarily taxed to the purchaser if the sale occurred before the record date or the date the stock begins selling ex-dividend; however, it is ordinarily taxed to the seller if the sale occurred after the record date. The fact that the dividend is reflected in the sale price does not change these results.See Treas. Reg. §1.61-9(c); Rev. Rul. 74-562, 1974-2 CB 28.