Question

1. Alicia received dividends on her stocks as follows.

Qualified Dividends

—Steinlager (a New Zealand corp. whose stock is traded               on an established US securities market) $45,000

—Star Inc, a Virginia Corp   11,000

Non-Qualifying Dividends

—Blaze Inc, a Delaware Corp   23,000

1. Alicia (single) purchased the Star stock four years ago, and she purchased the Steinlager stock two years ago. She purchased the Blaze stock 15 days before it went ex-dividend and sold it 20 days later at a $28,000 loss. Alicia had no other capital gains and losses for the year. She is in the 32% marginal tax bracket. Compute Alicia’s tax on her dividend income. Also, will she be able to deduct the entire capital loss from the Blaze stock?

Alicia’s daughter (single), who is not her dependent, had taxable income of $18,000, which included $3,000 of dividends on separate shares of Star, Inc stock. The daughter had purchased the stock two years ago. Compute the daughter’s tax liability on the dividends.

Answer 1

Calculation of Dividend incomeand tax thereon
	Alicia (single)
	Dividend	Nature	Amount	Rate of tax	Tax	Notes
	Qualified Dividends
A	Steinlager		45,000.00
B	Star Inc, a Virginia Corp		11,000.00
C	Total Qualified Dividends	A+B	56,000.00	15%	8,400.00	1
	Non Qualified Dividends
D	Blaze Inc, a Delaware Corp		23,000.00			2
E	Less :Capital Loss		3,000.00			3
F	Tax on Non Qualified Dividends	D+E	20,000.00	32%	6400
	Total Tax				14,800.00

Notes
1	Qualified dividends are taxed at the capital gains rates, which are lower than the tax rate. As per the tax law, the capital gain rate applicable to single filers, belonging to the income tax bracket which attract tax rate of 32% is 15%
2	Tax rate on non qualified dividend is same as the regular income tax bracket.In the case of Alicia it is 32%.
3	As per the Income tax law capital gain and loss can be used to off set each other and if any balance loss is there after the offset, upto the extend of $3000 ( for Singles) can be used to off set the regular income rest should be carry forwarded.

B. As the dividend received from star lnc by Alica was considered as qualified dividend it is assumed that all criteria for classifying to be a qualified dividend stands fulfilled except the holding period.

To be classified as a qualifying dividend the following holding period criteria should be full filled

a. held the stock for more than 60 days during the 121-day period that begins 60 days before the ex- dividend date.

Alicia’s daughter is holding the stock for two years so the dividend can be qualified as qualifying dividend.

In case of a qualifying dividend up to the taxable income of $ 39375 the tax rate applicable is 0%. As the daughter’s return is single and her taxable income is less than the threshold limit no tax should be levied on the dividend income.