If you have stocks of a exchange-traded fund (ETF), then you might receive distributions from the shape of dividends. These can be paid yearly or in another period, based upon your own ETF. It’s vital that you learn not all of dividends have been treated exactly the same in the tax perspective.
Types of benefits
There are just two primary forms of benefits issued to investors of ETFs:
- Qualified Stocks: These really are gains given by the ETF as capable, this means that they are eligible to be taxed at the capital gains rate, which is based upon the investor’s modified adjusted gross income (MAGI) and gross income (the prices will be 0%, 1-5 %, 18.8%, and 23.8percent ). These gains have been paid on stock held by the ETF, which has to have them for at least 60 days throughout the 121-day phase that begins 60 days until the ex-dividend day. More over, the investor needs to have the stocks within the ETF paying the dividend for over 60 days throughout the 121-day period that begins 60 days ahead of the ex-dividend day. This means in the event that you consciously trade ETFs, then you can’t meet this holding requirement.
- Nonqualified dividends: These dividends are not designated by the ETF as qualified because they might have been payable on stocks held by the ETF for 60 days or less. Consequently, they’re taxed at ordinary income rates. Basically, nonqualified dividends are the amount of total dividends minus any portion of the total dividends treated as qualified dividends.
Note: While qualified dividends are taxed at the same rate at capital gains, they cannot be used to offset capital losses.
Other ETF distributions
Depending on the type of ETF, other distributions to investors may not be qualified dividends. Here are a couple of examples of other types of distributions from ETFs:
- Fixed income ETFs pay interest, not dividends.
- Real estate investment trust (REIT) ETFs typically pay nonqualified dividends (although a portion may be qualified).
A dividend ETF is made up of dividend-paying stocks that usually track a dividend index. This ETF pays dividends to investors, which can be qualified or nonqualified dividends, as explained earlier.
Reinvesting ETF dividends
You can choose to use your ETF dividends to acquire more shares in the same ETF. However, there may be commissions for reinvesting dividends. So you need to check with the brokerage firm or other financial institution where you hold ETFs.
The brokerage firm or other financial institution at which you hold ETFs must annually report to the IRS and to you the payment of dividends of $10 or more (some institutions automatically report all dividends). Form 1099-DIV, Dividends and Distributions, is used for this purpose.
Net investment income (NII) tax
If you are a high-income investor, dividends may be subject to a special Medicare tax of 3.8%, in addition to any income tax on the dividends. This tax applies to net investment income and is called the NII tax.
If you receive a substantial amount of dividends from ETFs, you may need to pay quarterly estimated taxes. Work with your tax advisor to assess your estimated tax needs and to be sure that you properly report your ETF dividends on your tax return.