Taxes From A To Z (2014): X Is For XD

XD is a qualifier or symbol to indicate that a stock is trading ex-dividend. A stock is considered to be trading ex-dividend on or after the ex-dividend date. The ex-dividend date is the first date following the declaration of a dividend on which the buyer of a stock is not entitled to receive the next dividend payment: the seller will get the dividend. In other words, you must own a stock before the ex-dividend date to receive its next dividend.

When it comes to federal income taxes, the ex-dividend date matters for purposes of determining whether you have qualified dividends.

Qualified dividends are ordinary dividends which meet certain criteria that allows them to be taxed at the more preferable long-term capital gains tax rate.

To qualify for the maximum rate, the dividends must:

• Be paid by a U.S. corporation or a qualified foreign corporation;
• Not be: capital gain distributions; dividends paid on deposits with mutual savings banks, cooperative banks, credit unions, U.S. building and loan associations, U.S. savings and loan associations, federal savings and loan associations, and similar financial institutions; dividends from a corporation that is a tax-exempt organization or farmer’s cooperative during the corporation’s tax year in which the dividends were paid or during the corporation’s previous tax year; dividends paid by a corporation on employer securities held on the date of record by an employee stock ownership plan maintained by that corporation; dividends on any share of stock to the extent you are obligated to make related payments for positions in substantially similar or related property; payments in lieu of dividends if you know or have reason to know the payments are not qualified dividends; or payments shown on federal form 1099-DIV, box 1b, from a foreign corporation to the extent you know or have reason to know the payments are not qualified dividends; and
• Meet the appropriate holding period.

The holding period is key – and that’s where the ex-dividend matters. To qualify, you must have held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. When counting the number of days you held the stock, include the day you sold the stock, but not the day you acquired it.

The rules are a little different for preferred stock. If the preferred dividends are due to periods totaling less than 367 days, the holding period is the same as above. If however, the dividends are due to periods totaling more than 366 days, the holding period changes to more than 90 days during the 181-day period that begins 90 days before the ex-dividend date.

Fortunately, the determination whether dividends are qualified dividends is made for many taxpayers and is reported at box 1b of the Form 1099-DIV.

If, however, it’s necessary to make a determination about whether dividends are actually qualified dividends, you’ll want to work with your investment and financial advisors as well as your tax professional to figure the holding period and the ex-dividend date.