How can I tell if a dividend is qualified or not?
NOTE: This page is for users of the myICLUB.com investment club accounting and operations web suite. For individual investors, the Portfolio record keeping tool at StockCentral.com provides the same functionality for keeping track of investing transactions; see the related ex-dividend help page for the StockCentral Portfolio.
A “qualified dividend” is a dividend paid by a company on its stock and that is taxable by the IRS at a lower rate than the income tax rate that some taxpayers pay on unqualified (or ordinary) dividends. As a result of this lower tax rate, it is important that dividend transactions are recorded properly in the club’s books in order to determine the qualifying nature of those dividends.
About Distributions Paid to Members in an Investment Club
In an investment club, all club members are allocated their share of the club’s income, expenses, gains, and losses of the club at the end of every year. In addition, an allocation is made for a withdrawing member at the time of withdrawal. These allocations will include the amounts of qualifying and non-qualifying dividends, and will also appear on each member’s Schedule K-1. This way, members may pay a lower income tax rate on their share of the club’s qualifying dividends (assuming they are in a tax bracket that allows for the lower tax rates). Tax brackets and tax rates change regularly, so consult the IRS for current information.
About Qualifying Dividends
In order to be a dividend to be qualifying, it must meet three requirements.
- It must be paid by the common stock of a U.S. company or a qualifying foreign company.
- It must not be exempt from qualifying dividend treatment according to IRS rules. For example, dividends paid by real estate investment trusts (REITs), master limited partnerships (MLPs), on employee stock options, or by tax-exempt companies do not qualify. Money market dividends also do not qualify and are reported as interest income.
- The required holding period for the stock has been met. The shares must be owned for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date in order for the dividend to be qualifying. This prevents investors from “buying the dividend;” that is, buying the stock and holding it just long enough to receive the dividend before selling it. After the end of the year, financial institutions and brokerage firms will distribute Form 1099-DIV to customers that will include the amounts of dividends that were paid in the year and whether they were qualifying or non-qualifying.
Mutual Funds, ETFs, or most other securities in the broad category we call "Other" are bound by similar rules, as are their shareholders. Since shareholders will not necessarily know what securities a fund has bought and sold, the fund will report the qualifying amount of dividends that they distribute to each shareholder using Form 1099-DIV at year-end.
What Do I Do If the Amounts of Qualifying/Non-Qualifying Dividends Reported by Our Brokerage Do Not Match the Amounts in Our Books?
Occasionally, a brokerage will report amounts for qualifying and non-qualifying dividends that are different than amounts that are calculated in the club’s books. Here’s how to reconcile the differences:
- Check the Security Distributions Report (Reports > Securities > Security Distributions). This report will show whether each dividend is qualified or not, and can be useful for figuring out which dividend transactions might need to be adjusted.
- Confirm the transaction dates. The dividend payable date and the ex-dividend date must both be correct. myICLUB.com will automatically populate the ex-dividend date when entering a distribution transaction, but if not, do not guess the ex-dividend date. Compare this date to the ex-dividend date reported by your brokerage on your account statement. If your brokerage statement does not include the ex-dividend date, you can confirm it on myICLUB.com on the Stock Quotes This page can be reached from Accounting > Utilities > Get stock quote, or from the “Stock quote” entry box at the top of every page in your club’s myICLUB.com website; click the Dividends tab for a complete history of distributions paid by the company.
- Confirm that the Security Type in myICLUB.com is set correctly. In Accounting > Securities > Update security settings, the Type of each security owned by the club must be set correctly in order for distributions to be classified correctly in the club’s books. Remember, all or some of the distributions from some securities such as REITs, ETFs, mutual funds, or master limited partnershjps, are never considered qualifying dividends. If these securities are not set accurately, then the qualifying dividends reported by myICLUB.com will not he correct. To review and edit each Security’s settings in myICLUB.com, go to Accounting > Securities > Update security settings. Click the Edit button next to any securities that require updating, and select whether that security is a Common Stock, REIT, Other, Mutual Fund, or Fixed Income. Choose Other if you are unsure. Click Submit to save your changes.
- For Other securities, you will need information from your brokerage at the end of the year. Assuming all Mutual Funds, REITs, and other securities (Limited and Publicly Traded Partnerships, etc.) are identified accurately as above, you will be able to enter any qualifying dividend when completing your end-of-year allocation of income and expenses. These values will then flow into the Club Tax Printer.
Updating Common Stock Transactions in myICLUB.com
For common stocks, once you know the correct dividend payment and ex-dividend dates, you can adjust previously-entered distribution transactions in myICLUB.com.
- Click the Accounting Tab near the top of the page.
- From the Accounting page, click the Securities heading, to get to the portfolio / summary page.
- On the Portfolio / Summary page, click the View/Edit Transactions link on the left side of the page.
- By default, the system will show the last twelve months of transactions. If you need to see a different range of dates, change the From date in the Show Transactions box, and click Submit.
- When you have the correct date range, click on the one- or two-word description of the transaction (Dividend or Security Income, for example) to be taken to the transaction description.
- On the transaction description page, click Edit, and then make changes to the Payout date or ex-dividend date, as needed.
Allocating Income and Expenses at Year-End
Making any of the changes above will not necessarily automatically make dividends appear as qualifying or non-qualifying. After making any changes, you must generate (or re-generate) the year-end allocation:
- Select Accounting > Utilities > Allocate Income and Expenses.
- Use the drop-down menu to select the year of allocation, and then click Yes to begin the allocation.
- On the following screen, any stock whose “Type” is designated as “Other” either originally or adjusted, and which received dividends should now appear. You will see the total dividends, and be asked to enter the qualifying amount; if you leave the Qualifying Dividend amount blank, then the dividends for that security will be marked as non-qualified for that year.
- You may also see a section titled “Unrecap. Sec. 1250 Gain.” If the total shown is zero, you do not need to make any entries. If not, please check the Form 1099 received from your brokerage for any entries listed as “Unrecaptured Sec. 1250 Gain,” and enter them as well. Unrecaptured Sec. 1250 Gain is a specialized type of long-term capital gain distribution. It is most commonly distributed by REITs.
- Click OK, and the allocation will complete.
For more on ex-dividend dates from the Securities and Exchange Commission (SEC): www.sec.gov/answers/dividen.htm
For more on adjusting dividends in myICLUB.com when they have been reclassified by the brokerage or company: