Ask the Editor: What Are Qualified Dividends and More
Each week in our Ask the Tax Editor collection, Joy Taylor, The Kiplinger Tax Letter editor, solutions questions on subjects submitted by readers. This week, she’s taking a look at 4 tax questions from readers on investments, together with one on the definition of certified dividends. (Get a free issue of The Kiplinger Tax Letter or subscribe.)
1. Qualified dividends
Question: I do know that certified dividends are taxed on the identical charge as long-term capital good points. But what are qualified dividends?
Joy Taylor: Qualified dividends are dividends paid by U.S. firms and sure international firms. And there’s a holding interval rule. The taxpayer should personal the inventory for over 60 days throughout a 121-day interval that started 60 days earlier than the ex-dividend date. Note that dividends obtained from investments in actual property financial backing trusts, or REITs, typically aren’t handled as certified dividends.
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A international company should meet one in every of three necessities for its dividends to be handled as certified dividends. It should be included in a U.S. possession. It should be eligible for advantages underneath a tax treaty with the U.S. that has an exchange-of-information part. Or its inventory should be readily tradable within the U.S.
Qualified dividends are taxed at long-term capital gains rates of 0%, 15% or 20% (plus the three.8% net investment income tax for upper-income people). Dividends that aren’t certified dividends are topic to tax on the common income tax rates for unusual revenue.
2. Sale of a rental house
Question: I’m married and personal a rental house, which I purchased for financial backing. I plan to promote later this yr. Do I qualify for the $500,000 capital gains exclusion after I promote?
Joy Taylor: Unfortunately, no. The achieve exclusion you might be referring to applies solely to gross sales of principal residences, which means you reside within the house.
Generally, in case you have owned and lived in your predominant house for no less than two out of the 5 years earlier than the sale date, as much as $250,000 ($500,000 for joint filers) of your achieve once you promote the house is tax-free. Any achieve above the $250,000/$500,000 exclusion quantity is taxed at long-term capital good points charges of 0%, 15% or 20%, relying on the quantity of your taxable revenue, plus the three.8% web financial backing revenue tax for individuals with larger incomes.
Since you maintain rental property, the achieve or loss once you promote is mostly characterised as a capital gain or loss. If the property was held for multiple yr, it is a long-term capital achieve or loss, and if held for one yr or much less, it is a short-term capital achieve or loss.
The achieve or loss is the distinction between the quantity realized on the sale and your tax foundation within the property.
The capital achieve will typically be taxed at 0%, 15% or 20%, plus the three.8% web financial backing revenue tax for individuals with larger incomes. However, a particular rule applies to achieve on the sale of rental property for which you took depreciation deductions. When depreciable actual property held for multiple yr is bought at a achieve, the federal tax legislation requires that beforehand deducted depreciation be recaptured into revenue and taxed at a prime charge of 25%. This is called unrecaptured Section 1250 achieve, the variety of its federal tax code part.
3. Net financial backing revenue tax
Question: When I filed my 2025 Form 1040, I needed to pay the web financial backing revenue tax for the primary time. What is that this?
Joy Taylor: The 3.8% web financial backing revenue (NII) tax was enacted greater than 10 years in the past underneath the Affordable Care Act. It applies to single filers with modified adjusted gross revenue (AGI) over $200,000, joint filers with modified AGI over $250,000, and married individuals submitting individually with modified AGI above $125,000. For this objective, modified AGI is outlined as AGI plus tax-free foreign-earned revenue.
The NII tax, which is added to the common revenue tax, is due on the lesser of NII or the surplus of modified AGI over the $200,000/$250,000/$125,000 thresholds. Investment revenue of trusts and estates can be hit with the three.8% NII tax if their 2026 AGI exceeds $16,000 they usually have undistributed web financial backing revenue.
NII consists of what is usually considered financial backing revenue: Dividends, capital good points, taxable curiosity, annuities, royalties and passive rental revenue. Trade or industry revenue derived by a passive exercise can be NII, offered that the industry revenue isn’t in any other case topic to self-employment tax.
Unlike lots of the federal income tax breaks and revenue phaseout ranges, the person revenue ranges for the three.8% NII tax aren’t listed to inflation every year. The $125,000, $200,000 and $250,000 modified AGI thresholds have stayed stagnant for the reason that tax first took impact in 2013, regardless of the excessive development in wages, revenue, and good points from gross sales of actual property and different financial backing property. As a end result, extra filers are paying this tax every year.
4. Mutual funds
Question: I put money into a taxable mutual fund. Each yr, the fund sends me Form 1099-DIV, reporting capital good points distributions, which I embrace on my Form 1040. When I promote my mutual fund shares, I must pay capital good points tax on the appreciation in my shares from the acquisition date to the sale date. Isn’t this double taxation?
Joy Taylor: When the fund sells inventory inside your portfolio, you might be taxed in your share of the capital good points from that sale, however the fund supervisor then reinvests these good points to purchase extra shares within the fund for you, thus growing your tax foundation in your fund shares. So once you promote your mutual fund shares, you might need capital good points, however you will have the next tax foundation due to the beforehand reinvested capital good points. Thus, your capital achieve once you promote your fund shares is decrease.
About Ask the Editor, Tax Edition
Subscribers of The Kiplinger Tax Letter, The Kiplinger Letter and The Kiplinger Retirement Report can ask Joy questions on tax subjects. You’ll discover full particulars of the way to submit questions in every publication. Subscribe to The Kiplinger Tax Letter, The Kiplinger Letter or The Kiplinger Retirement Report.
We have already obtained many questions from readers on subjects associated to tax modifications within the One Big Beautiful Bill, retirement accounts and extra. We will proceed to reply these in future Ask the Editor roundups. So preserve these questions coming!
Not all questions submitted will likely be revealed, and a few could also be condensed and/or mixed with different comparable questions and solutions, as required editorially. The solutions offered by our editors and consultants, on this Q&A collection, are for common informational functions solely. While we take cheap precautions to make sure we offer correct solutions to your questions, this data doesn’t, and isn’t supposed to, represent unbiased monetary, authorized, or tax recommendation. You mustn’t act, or chorus from appearing, primarily based on any data offered on this characteristic. You ought to seek the advice of with a monetary or tax advisor relating to any questions you might have in relation to the issues mentioned on this article.
