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DIVIDEND TAX CONSIDERATIONSWhat You Need to Know

For Federal income tax purposes, depending on the type of stock, the dividends you receive could be classified as

"qualified" or "non-qualified." Which classification applies could affect the income tax rates that apply to your dividends.

QualifiedDividends

Qualified dividends must be paid by a corporation that is subject to U.S. corporate income taxes, or by a foreign

corporation based in a country that is eligible for benefits under a U.S. tax treaty. Most dividend stocks, such as those

issued by utilities, banks or other financial institutions, or firms that make products or sell services, fall into the qualified

category. For those, the your dividend tax rate depends on your ordinary income tax rate, but tops out at the maximum

capital gains rate, which is 15%.

If your stocks are held in a taxable account, you report qualified dividends on Line 9b of IRS Form 1040. If your dividends

totaled more than $1,500, the IRS requires you to detail the payouts on Schedule B. Click herefor IRS dividend filing

instructions. If you're stocks are held in a tax-sheltered account, taxes will not be an issue for qualified dividends.

Non-Qualified Dividends

Dividends paid by tax-exempt corporations or trusts such as Business Development Corporations (BDCs), Master Limited

Partnerships (MLPs), Limited Liability Corporations (LLCs), or Real Estate Investment Trusts (REITs) are considered

non-qualified, and may be taxed at ordinary rates. You report non-qualified dividends on Line 9a of IRS Form 1040.

Business Development Corporations

BDC dividends are mostly taxed at ordinary income tax rates, However, after the year-end, a BDC may designate a portion

of the prior year's dividends as "return ofcapital," which may be treated as a capital gain. Return ofcapital payouts reduce

your cost basis and are not taxable until you sell your shares, when they are taxed at the appropriate capital gains rate.

Real Estate Investment Trusts

REIT dividends are mostly taxed at ordinary income tax rates. However, after the year-end, a REIT may designate a

portion of its prior year's payouts as "qualified dividends," which qualify for the maximum 15% rate. On average, roughly

OrdinaryIncome Tax Rate

Qualified DividendIncome Tax Rate

10% 0%

15% 0%

25% 15%

28% 15%

33% 15%

35% 15%

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20% of annual payouts fall into this category. A REIT may also classify portions of its prior year payouts as return of

capital.

Master Limited Partnerships & Limited Liability Corporations

For income tax purposes, MLPs and LLCs are treated the same. Both require filing IRS Schedule K1 forms, which are

more complicated than Form 1040s. If they exceed certain limits, portions of dividends received from MLPs and LLCs

could be considered "unrelated income," and be taxable. For details on MLP and LLC tax considerations, click here.ABOUT HARRY DOMASHDIVIDEND DETECTIVE

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