4

One implies ordinary income tax while the other is taxed according to capital gains tax, but how would you convince the IRS that your dividend payment is a special one and should be taxed at capital gains tax rate?

3
  • 1
    Do you mean a qualified dividend?
    – jcaron
    Sep 19, 2023 at 14:21
  • Your assumptions about how dividends are taxed is wrong. Both regular and special dividends can be qualified (so you you're taxed at a special rate), non-qualified (so you're taxed at your marginal rate), or basically any other rate (return of capital isn't taxed now, section 199A dividends have their own special rate, etc.) or a combination of rates. Your 1099 will tell you which.
    – blm
    Sep 21, 2023 at 6:59
  • Note: when people mention payroll tax they mean those other taxes for medicare and social security, they don't mean income tax. Sep 21, 2023 at 12:35

2 Answers 2

10

This is determined by how the company files it, not by anything the stockholder says. Your broker's 1099 form at the end of the year will tell you how it was reported to the IRS, and your return needs to match that.

2
  • 1
    There are lots of reasons your brokerage statement may be wrong about how a payment is classified. It's the 1099 that matters, as that's what's reported to the IRS.
    – blm
    Sep 21, 2023 at 6:54
  • 1
    Point. granted.
    – keshlam
    Sep 21, 2023 at 12:27
4

Regular dividends are paid on a preset schedule. If a company pays dividends, it's common to pay them every quarter.

Sometimes a company will pay an extra dividend outside this normal schedule, due to a one-time activity that creates a sudden large influx of cash (e.g. a merger or acquisition). This is a special dividend.

I don't think there's any difference in how they're taxed. However, special dividends can affect tax planning -- regular dividends are usually at the same rate, so you can predict what you'll receive for the rest of the year (the Board of Directors declares the dividend periodically, but it's usually a rubber stamp to keep the same rate). Special dividends are unpredictable so you can't easily plan for them. But they're also pretty rare.

Note that this predictability is only for individual stocks. Mutual funds are more variable because composition of the portfolio changes over time. They don't generally pay special dividends; they receive the special dividends from the stocks they own, but they're incorporated into the dividend distributions they pay out on a regular basis.

4
  • There's no a priori difference in how they're taxed, they're all just dividends. There may be differences in specific instances.
    – blm
    Sep 21, 2023 at 7:02
  • @blm The only tax-related distinction I can think of for dividends is ordinary vs. qualified, and that comes from the length of time you've held the stock before the ex-dividend date. It's unrelated to how the dividend was declared.
    – Barmar
    Sep 21, 2023 at 14:20
  • There are many more ways a dividend can be categorized than just ordinary vs qualified (in my Quicken file I think I have 9, and those are just ones I've experienced, there are probably more), and I think stock holding period only affects one of those (it can turn a qualified into an ordinary dividend), the rest are determined by the payer. However, I agree that special vs regular dividend doesn't come into play at all, they're both just dividends and will be taxed depending upon how the company categorizes each dividend.
    – blm
    Sep 21, 2023 at 16:55
  • @blm+ the minimum holding for qualified div can be either before or after ex-div (though you must hold at least one day before ex-div to get the div at all). Distributions for return-of-capital or (much rarer) liquidation are not technically dividends but are often (mis)described as such, and so are interest distributions from a bond fund and cap gain distributions from anywhere. Stock dividends (including spinoffs) OTOH are dividends but if they dot the i's they aren't taxed now, instead they divide your basis and increase cap gain later. Sep 22, 2023 at 2:51

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .