Part 2. Tax on Stock Dividends
First, domestic qualified stock dividends are taxed at capital gain rates. How to determine if a dividend is qualified or not? If you have held your stock for more than 60 days within the window that extends from 60 days prior to 60 days after the ex-dividend date (the date the company declares a dividend payment).
Non-qualified dividends are taxed at your ordinary income rate.
Foreign stock dividends: many countries withhold taxes on dividends paid to foreigners. If you invest in an international fund, an international stocks, or an ADR, you will see box 7 of your 1099-DIV form will include an amount indicating the foreign taxes paid. The Foreign Tax Credit lets you recoup some or all of these taxes. Each year, you will have the choice of taking a deduction for foreign taxes, which reduces your taxable income, or a credit, which reduces your taxes dollar for dollar. It is generally better to take the credit. You can use Form 1116 to figure the tax or credit, and enter it on Schedule 3 of Form 1040.
Next, we will discuss cost basis.