Question

Matt knows that cash dividends are taxable in general. But when he received stock dividend, he was wondering if the stock dividend is taxable, because he didn’t really receive anything other than the stock certificate which only means a piece of paper to him. He wishes to consult with you on whether his stock dividend is taxable. How would you answer and what are the question(s) you may ask Matt, if any, for your accurate and proper consultation?

Answer 1

Answer - Taxability of dividend: First of all we know about two kinds of dividend first one is cash dividend and second one is known as stock dividend. First and foremost question needs to be asked to matt is that if dividend is qualified dividend or non-qualified dividend. Non-qualified dividend: Generally speaking most of dividend are non-qualified dividend, taxable at ordinary income are normal rate of income tax. Qualified dividend: Talking about qualified dividend, things that should be noted is that this kind of dividend is taxed in capital gains at a lower rate, refer to IRS guidelines for more knowledge about conditions to satisfy for qualifying dividend. Cash dividend in case categorized as qualified one, is taxable as capital gains at lower percentage. Likewise if the stock dividend is paid in lieu of cash, in that case it will be taxable as the ordinary cash dividend.

I would ask Matt that whether such dividend held in retirement account as dividend in stock is not taxable for retirement account. If stock is kept in retirement account rather than brokerage account then these dividend are not taxed. In this case If the same is kept in non retirement account, then as mentioned above its classification has be decided, as qualified or non qualified, according it will as treated. If his answer is No, then I would further ask him whether they are qualified dividend (i.e received from US company or qualified foreign company and holding period criteria is met or not and if yes then it will be taxable at Long-term capital gains rate otherwise at normal rates.

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