Posts Tagged ‘dividend tax treatment’

Dividend Taxation Treatment in USA

By: mike | Date posted: 04.10.2011 (5:00 am)

Investing in dividend paying companies is a huge opportunity in this moment. The current P/E ratio is historically low (12.9 vs an historical average of 15) and dividend taxation treatment works in the favor of investors right now, through low tax rates, available until 2013. There are some categories of dividend income with 0 % tax rates.

Which Dividend Tax Treatment to apply?

Finding out everything about dividend taxation treatment helps you to make the right decision on how to invest your money. The low tax rates for dividend income were introduced in 2003, under Bush administration, and were supposed to last until 2010, but the legislation was extended for two more years. If you are interested to invest in dividend paying companies, you should do it as soon as possible, in order to benefit from low tax rates.

In this moment, the lowest tax rate for dividend income is 0%, and the highest 35%. Since 2013, the situation will change: the lowest tax rate for dividend income will be 15%, while de highest will be 39,6%.

Qualified dividends taxation treatment

Dividend taxation treatment is different for qualified and ordinary dividends. With qualified dividends, you get lower tax rates. When you decide your investment strategy, you need to consider this important aspect, which has a huge impact on your profits.

Under US legislation, qualified dividends are the ones that meet some specific criteria and are taxed as capital gains. In order to qualify for this preferential dividend taxation treatment, you need to have held the stock for at least 61 days, during the 121 days period that starts 60 days before the ex-dividend date.

Ex-dividend date is two days before the record date, when companies count all the shareholders. Other conditions for qualified dividends: to be paid until December 31, 2012, to be paid by a US corporation, one located in a country eligible for benefits due to a US tax treaty or a foreign corporation traded on a US stock market. If your ordinary income tax rate is 10 % or 15 %, you benefit form 0% tax rates for qualified dividends income in 2011 and 2012. Since 2013, the tax rates for qualified dividends income will increase to 15 %, respectively 28%. If you fall under higher ordinary income tax rates, for the qualified dividend income your tax rates will be 15 % in 2011 and 2012 and 31 %, 36 % and 39,6 % starting with 2013.

Ordinary dividends taxation treatment

Some of the dividends are not treated as capital gain and are taxed at higher rates. If a mutual fund pays you dividends that come from taxable interest, from shares which were hold less then 61 days or from short term capital gains, those dividends are treated as ordinary income. In 2011 and 2012, you will be taxed, for your ordinary dividends, at the same rates as for the rest of your income: 10, 15, 25, 28, 33 and 35 percent. Starting with 2013, the tax rates for ordinary dividends income will increase to 15, 28, 31, 36, respectively 39,6 percent, considering the tax bracket where you fall.

How to pay taxes on your dividend income

Companies that pay you more then $10 in dividends have to send you a DIV-1099 form, which you have to fill in the appropriate fields, for qualified or ordinary dividends. If you are unsure about the correct way to fill your dividend tax forms, you should contact a reliable accountant.

When you decide the course of your investments, you have to consider the tax rates. For example, if you decide to sell some stocks at a certain moment, you have to check first whether the transaction affects your taxes. If you sell your stocks from dividend paying companies sooner then the minimum 61 days holding period necessary to benefit from lower tax rates, you might end up losing money, instead of making money.

Professional help to understand US dividend tax treatment

Understanding exactly how the taxation mechanism works on leads you to the right investment strategy. However, you might need advice from your accountant and your stockbroker agent, before making important business decisions. The difference between the way that qualified dividends and ordinary dividends are taxed is significant. For example, if you cash $1000 in dividends, for qualified dividends the taxes are among 0 and 150 dollars. For ordinary dividends, you will pay between $100 and $350 in taxes.

Useful Dividend Taxation Form:

Form 1116: Foreign Tax Credit

Form 1099-DIV: Dividend & Distribution Income

Form 1099-INT: Interest Income

Foreign Dividend Taxation Treatment

By: mike | Date posted: 04.08.2011 (5:00 am)

The subject of foreign dividend taxation treatment is a very complex one. In United States, the Internal Revenue Service (IRS) imposes taxes to all income, whether it was obtain in United States or in another country.

A solid knowledge on how foreign dividends are being taxed can help you save a lot of money. If you get dividends from a foreign company, those dividends are taxed in the country of origin.

Dividend double taxation problem

To avoid double taxation, you could claim a tax credit from IRS. For example, if your dividend income was taxed by $100 in a foreign country, you have the right to claim $100 tax credit, reducing the income of taxes paid in US.  You really need a certified accountant to help you deal with all the forms you need to file, in order to benefit from foreign dividends tax credit.

Requirements of foreign dividends tax credit

In order to benefit from US tax credit for foreign dividend income, there are some criteria you need to comply. First of all, the income needs to be passive (like dividends or interest).

Also, the qualified foreign taxes can’t be higher then $300 and you need to fill form 1099-DIV or 1099-INT for all your gross foreign income. If you have shares to a mutual fund with important holdings of foreign stocks, you will probably be able to claim the tax credit on the foreign income taxes paid by the fund. However, you need to be careful: the mutual funds that have shares to other foreign funds don’t qualify for tax credit. That’s because they are not actually paying the foreign taxes themselves.

How to benefit from tax credits

If you want to benefit from tax credit for your foreign dividend income, you should buy shares to mutual funds that qualify. If you’re unsure about the tax credits that you can claim, you should call directly the fund, to find out all the details on dividend distribution and the foreign tax per share already withheld. In order to claim your foreign tax credit, you have to file Form 1116 or you can enter the information on Form 1040. However, since the procedures related to foreign dividend taxation can be quite tricky, you should ask advice from a certified accountant or a tax attorney.

Dividends from foreign companies can be treated as qualified dividends

Qualified dividends give you access to low tax rates: in 2011 and 2012, you can benefit, for those dividends, from tax rates of 0% to 15%, based on tax calculators and estimators. The main conditions are to have held the stock for at least 61 days during a period of 121 days, which starts with 60 days prior to ex dividend date.

The ex dividend date comes two days prior to the shareholders Record Date, performed by a company. In other words, qualified dividends generally come from long-term investments. Also, the dividends need to be paid by companies from countries that signed tax treaties with US.

Qualified Dividend per countries:

There is a list of fifty-two countries that can offer you qualified dividends: Australia, Austria, Belgium, Canada, China, Cyprus, Czech Republic, Denmark, Egypt, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Indonesia, Ireland, Israel, Italy, Jamaica, Japan, Kazakhstan, Latvia, Lithuania, Luxembourg, Mexico, Morocco, Netherlands, New Zealand, Norway, Pakistan, the Philippines, Poland, Portugal, Romania, Russia, Slovakia, Slovenia, South Africa, South Korea, Spain, Sweden, Switzerland, Thailand, Trinidad and Tobago, Tunisia,  Turkey, Ukraine, United Kingdom, and Venezuela.

Also, if the foreign company that pays you dividends is incorporated in a US possession (American Samoa, Northern Marianas, Guam, Palau, Marshall Islands, Puerto Rico, Federated States of Micronesia or US Virgin Islands) they can also qualify for low tax rates. Foreign stocks that are traded on established US securities markets offer you the opportunity of qualified dividends.

Final Thoughts on Foreign Dividend Tax Treatment

If your portfolio contains shares to a lot of foreign companies and you want to claim your tax credit, the taxes already paid need to be detailed for each country. This rather painful activity will be charged extra by your accountant or your tax attorney, so you need to find out if it’s worth applying for the tax credits.

Generally, the foreign taxes withheld by international mutual funds are around $30 for holdings of $10 000. If the effort to claim the tax credit is worth it has to do with the size of your portfolio.

You might as well invest in an international ETF or mutual fund including dividend payers instead of running into this dividend tax treatment nightmare!

We have written specific article on tax treatment for Americans and Canadians:

Dividend Tax Treatment in United States

Dividend Tax Treatment in Canada

Useful Dividend Taxation Form:

Form 1116: Foreign Tax Credit

Form 1099-DIV: Dividend & Distribution Income

Form 1099-INT: Interest Income

Dividend Taxation Treatment in Canada

By: mike | Date posted: 04.06.2011 (10:47 am)

Dividend taxation treatment in Canada motivates investors to buy shares from dividend paying companies. Canadian law offers a system called Dividend Tax Credit, designed to eliminate the inconvenient of double taxation. Each investor that gets dividends from a Canadian corporation also receives, from a government, the so-called dividend tax credit. In the end, when you are investing in a non-registered account, dividend payouts are less taxed than interest earned from a bond or a certificate of deposit.

How dividend taxes are calculated in Canada

Both federal and provincial governments from Canada offer to the individual investors tax credits, which are a percentage from the grossed up amount of the dividend income. There are two types of dividends: eligible dividends and non-eligible dividends.

Eligible dividends are paid by public corporations from Canada, while non-eligible dividends come from private Canadian companies.

The dividend tax credit is different for the two types of companies, but it’s always a percentage of the grossed up amount of dividends income. Other then eligible dividends are grossed up by 25 percent, while eligible ones are grossed up by approximately 41%. The sum you obtain this way is used to calculate the actual amount of the tax credit, applying a percentage that varies from province to province.

However, the amount of the tax credit generally covers the taxes already paid by the corporation for those dividends. The tax credit is deducted from the total amount of taxes that the investor has to pay.

Dividend Tax Treatment Calculation

To make things clearer, let’s take an example, based on dividend taxation treatment from British Columbia. If you have shares to a public Canadian corporation, and those shares bring you $1000 in dividends, the corporation has to pay taxes of approximately $310. This means that you actually cash $690, and, as individual, you still have to pay taxes on that income.

Grossing up your dividend income by a 1.45 rate takes you back to $1000. Then, you apply to this sum the 31 percent tax credit that works in British Columbia – $310. From the $690 dividend income, you deduct the $310 tax credit. You obtain $380, and you only have to pay taxes on that money.

Why Dividend Payout Are Grossed Up:

As demonstrated in the tax treatment calculation example, the tax system makes sure that you don’t pay taxes on the money already collected by the government directly from the corporation. This is why it is grossed up and then they apply a tax credit.

Benefits from such dividend tax treatment

The real amount of taxes paid for Canadian dividends income drops dramatically, thanks to this system. From that point of view, dividend taxation treatment in Canada is a lot friendlier to investors then the US taxation system for dividends income. The lowest tax rate on dividends, in Canada, is 3 percent, while the highest is 30 percent. As a rule of thumb, you can always consider the following tax treatment according to which type of income you are earning (tax percentages are actually lower but this quick rule helps you understand the difference between each type of tax treatment) :

Interest & revenue income: 50%

Dividend income: 30%

Capital gains income: 25%

Advantages of Canadian dividend taxation treatment

There are obvious advantages of dividend taxation treatment from Canada. While US corporations and investors complain about double taxation, Canada law pretty much solves the problem.

The amount of taxes you pay on dividend income is low – thus your profits are higher.  When buying shares to Canadian companies, you should find out if the dividends paid by those companies are eligible or non eligible.

You should aim for eligible dividends, which get higher tax credit. Dividends paid by most of the public corporations from Canada are considered eligible for enhanced tax dividend credit.

Before investing your money, you should obtain all the relevant information about dividend taxation. If applied correctly, the Canadian dividend taxation treatment can save you a lot of money.

Professional help is advised in regard to Canadian Dividend Tax Treatment

However, the taxation system from Canada is quite complex. There are taxes to be paid to the federal government, and also provincial taxes. Filling the tax forms is complicated. This is why, if you decided to invest in dividend paying Canadian companies, you need to hire a Canadian accountant.

A good accountant will be able to tell you everything about dividend taxation treatment from different provinces of Canada. You can also ask for advice from Canada Revenue Agency or the International Tax Services Office.

Whether you are a resident or a non-resident in Canada, investing in dividend paying Canadian companies is a huge opportunity. To make the most of this opportunity, you should find a reliable stockbroker to help you build a solid investments portfolio.

As we stated before, getting an accountant is also important. Make sure you hire only reliable, trustworthy professionals. A short online search will help you determine if you contacted the right accounting and trading firms.