Taxation fo Dividends
Dividend cash payments are taxed differently depending on whether this is an Earning Dividend, and Interest Dividend or a Return of Capital dividend:
- Earning dividends are reported as part of your income and are taxed at either your normal tax rate or the lower qualified dividend tax rate, depending on how long you held the shares.
- Interest Dividends are always taxed as regular income, and do not qualify to the lower dividend tax rate.
- Return of capital dividends are taxed as a capital gain at the time you sell.
This only applies to investors paying taxes in the US.
Earning Dividends are taxed at a lower rate
Earning divident for which you held the undelying stock long enough qualify to the lower 5% or 15% tax rate. However the IRS requires you to hold the stock for at least 60 consecutive days within a 121-day larger window, spanning 60 days before and after the ex-dividend date. Otherwise, the dividend is taxed as regular income.
Reporting on your 1099-DIV form
You will receive a 1099-DIV form from your broker detailing dividends you have received that qualify to the lower rate.
Note: Many broker's 1099-DIV forms include in box 1b all dividends that potentially qualify, even if you didn't hold the underlying stock long enough to qualify. It's your responsibility to report dividends as "non-qualifying" if you hadn't held the stock for 60 days. On your 1099-DIV form, dividends are reported in two boxes. Box 1a lists total dividends paid to you by your broker. Box 1b lists the amount of dividends which potentially qualify for the lower tax rate.
Withholding taxes on Canadian Trusts
Canada levy a withhoilding taxes on dividends paid to foreign investors. For US Holders, the withholding is usually 15% of the gross dividend. To compensate, those Canadian trusts that do trade in the U.S. often offer a higher yield. More about Canadian Trusts.
