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Taxation



Sometimes, an investor may receive less returns than would have been anticipated. The reason for this is in most cases as a result of taxation of the investment. This is more so with investments like mutual funds. However, the securities under this category tend to be charged much lower tax than others. Ordinary dividends are the returns that are more prone to taxation.

For your dividends not to be taxed or to be given a special treatment, they must be included in a category known as qualified. Your dividends may be non-qualified if they include terms like taxable interest. This means that when a mutual fund receives taxable interest, the interest gets paid out as dividends, but at a lower amount because of the deducted tax.

If your investment also receives some non-qualified dividends, it gets paid out to you the investor as unqualified. This means that it will be subject to tax. To convert it into qualified dividend, the fund must hold the dividend for about 61 days for it to be paid out to you as a qualified dividend. Short-term capital gain is also a term that disqualifies your dividend from favorable tax rates. This means that when a divided has a short-term capital gain, the income is paid out as ordinary dividend, which again is subject to tax.

When trying to determine how much tax your dividend is subject to, you can make use of some simple tips. One, look at the forms 1099-DIV and form 2439 to see the amount of tax allocated to any amount of the dividend. This is given in percentages. Then look carefully to see whether the income was from interest or from dividends.