Dividends, Interest, Rents, and Royalties: Tax Results and Reporting

  1. Dividends

Dividends are payments made by a corporation to its shareholders from current or accumulated earnings. Dividends can be paid in cash, other assets, and even the company’s stock. The corporation does not get a tax deduction for these payments, but the investors must include them in their taxable income in the U.S. After earnings and profits are exhausted, the payments are considered a return of capital to the extent of the total basis in the hands of each shareholder. If distributions exceed the basis, they are considered capital gains. There is a requirement that corporations pay dividends if the accumulated earnings are $250,000 or more, and there is no reasonably foreseeable need for this cash.

Generally, there is no tax deduction for the paying corporation. Some notable exceptions include real estate investment trusts, mutual insurance companies, and cooperatives.

US individual shareholders are required to pay taxes on dividends at a reduced rate ranging from 0% to 23.8% for Federal income tax purposes, and there may be additional taxes imposed by individual states. On the other hand, U.S. corporate shareholders are taxed on only 50% of the dividends they receive, at a rate of 21%. However, if the corporate shareholder owns at least 20% of the corporation paying the dividends, the taxable amount decreases to 35%. Furthermore, if the ownership stake is at least 80% in terms of both voting power and value, no dividend taxation applies.

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