Qualifying Dividends
Introduction
A “qualified dividend” is a dividend paid by a company on its stock and that is taxable by the IRS at a lower rate than the income tax rate that some taxpayers pay on unqualified (or ordinary) dividends. As a result of this lower tax rate, it is important that dividend transactions are recorded properly in order for StockCentral Portfolio to determine the qualifying nature of those dividends as shown on the various reports.
About Qualifying Dividends
In order to be a dividend to be qualifying, it must meet three requirements.
1.It must be paid by the common stock of a U.S. company or a qualifying foreign company.
2. It must not be exempt from qualifying dividend treatment according to IRS rules. For example, dividends paid by real estate investment trusts (REITs), master limited partnerships (MLPs), on employee stock options, or by tax-exempt companies do not qualify. Money market dividends also do not qualify and are reported as interest income.
3. The required holding period for the stock has been met. The shares must be owned for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date in order for the dividend to be qualifying. This prevents investors from “buying the dividend;” that is, buying the stock and holding it just long enough to receive the dividend before selling it. After the end of the year, financial institutions and brokerage firms will distribute Form 1099-DIV to customers that will include the amounts of dividends that were paid in the year and whether they were qualifying or non-qualifying.
Mutual Funds, ETFs, or most other securities in the broad category we call "Other" are bound by similar rules, as are their shareholders. Since shareholders will not necessarily know what securities a fund has bought and sold, the fund will report the qualifying amount of dividends that they distribute to each shareholder using Form 1099-DIV at year-end.
Identifying Qualifying Dividends
To ensure that your personal records in StockCentral Portfolio match the brokerage records, make sure that:
1. The Security Type is set correctly. In Portfolio > Utilities > Edit security settings, the Type of each security owned must be set correctly in order for distributions to be classified correctly in the club’s books. Remember, all or some of the distributions from some securities such as REITs, ETFs, mutual funds, or master limited partnershjps, are never considered qualifying dividends. If these securities are not set accurately, then the qualifying dividends reported by StockCentral Portfolio will not be correct. Select whether that security is a Common Stock, REIT, Other, Mutual Fund, or Fixed Income. Choose Other if you are unsure. Click Submit to save your changes.
2. The Ex-Dividend Date for each transaction is correct. StockCentral Portfolio will automatically populate the ex-dividend date when entering a distribution transaction, but if not, do not guess the ex-dividend date. Compare this date to the ex-dividend date reported by your brokerage on your account statement. If your brokerage statement does not include the ex-dividend date, you can confirm it in StockCentral Portfolio on the Stock Quotes page. This page can be reached from Portfolio > Utilities > Get stock quote, then click the Dividends tab for a complete history of distributions paid by the company.
More Information:
For more on ex-dividend dates from the Securities and Exchange Commission (SEC): www.sec.gov/answers/dividen.htm