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by: quincw
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These notes cover what was needed for CPA 3, including a summary of the video and information on the tax formulas.
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This 18 page Class Notes was uploaded by quincw on Thursday September 1, 2016. The Class Notes belongs to FIN 330 at Western Kentucky University taught by Rhoades in Fall 2016. Since its upload, it has received 4 views. For similar materials see Print of finance management in Finance at Western Kentucky University.


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Date Created: 09/01/16
FIN 330 – DR. RHOADES CPA #3, PART A: READINGS AND VIDEOS - Exploring the Financial Crisis of 2008 Why is this important? Because: … history repeats itself; … “systemic risk” continues in the financial markets, today; … your ability to understand the financial crisis will empower you to understand certain risks in the economy, and in the financial markets, today – which may in turn affect your decisions of a financial nature (on behalf of a corporation, or for yourself). 1. EXPLORING THE FOUNDATIONS OF THE 2008 FINANCIAL CRISIS. The origins of the financial crisis are complex, but understandable. a. Large amount of real estate mortgages taken out, many of them “sub-prime.” In the decade prior to 2008, real estate mortgages were taken out by purchasers of homes. i. Mortgages are typically issued by commercial banks (i.e., banks loaned the money to purchasers of the homes) to secure the loan made. The loan itself is made by a promissory note. The mortgage is a lien on the property, permitting the owner of the mortgage (the bank) to “call the note” and foreclose on the property if the homeowner fails to make timely payments of principal and interest. ii. Many loans were given out as “easy credit” became available. Instead of ensuring that purchasers could afford the homes, personal financial records were increasingly falsified by some banks and mortgage brokers. 1. Many mortgages were “sub-prime.” A subprime mortgage is a type of loan granted to individuals with poor credit histories (often below 600), who, as a result of their deficient credit ratings, would not be able to qualify for conventional mortgages. 1 2. Home ownership rates in the U.S. rose dramatically – from 64% in 1995 to 69% in 2006. b. Real estate prices rose dramatically between 2000 and 2006. Fueled by the “easy credit” available, more and more Americans bought homes. In addition, “speculators” purchased homes for the purpose of “flipping” them – selling the home shortly thereafter for a higher price. For over 70 years before this, home prices in the United States were relatively stable, rising at a pace slightly higher than the rate of inflation (on a per-square-footage basis). As a result of the “easy credit” available and increased demand for homes, home prices rose dramatically between 2000 and early 2006. 2 c. Mortgages are bundled together and “securitized.” The commercial banks sold these mortgages to investment banks. The investment banks then grouped these mortgages together into “mortgage-backed securities” by various investment banks. d. Many of the Mortgage-Backed Securities, Despite Holdings of Sub-Prime Investments, are Assigned “AAA” Ratings by Ratings Agencies. The bond rating agencies, such as Standard and Poors, Fitch, Duff & Phelps, undertake an analysis of the mortgage-backed securities and assign them extremely high financial strength ratings – often AAA. i. Ratings agencies are paid by the investment banks (who put together the mortgage-backed securities) to issue the ratings. The rating agencies compete with each other for the business of the investment banks, in order to secure rather large fees they receive for issuing the ratings. e. Mortgage-Backed Securities Are Sold to Investors as “Safe” Investments. These securities were then sold to investors, including commercial banks, institutional investors (pension funds, mutual funds), foreign governments, and individual investors. f. 2006: Real Estate Prices Begin to Fall. Beginning in mid-2006, real estate prices, buoyed by the wave of purchasing, suddenly began to fall. g. Bear Stearns – The First Investment Bank to Fail. As real estate markets fell, the value of Bear Stearns’ holdings of mortgages and mortgage-backed securities also fell. Rumors began to circulate that 3 Bear Stearns, one of the oldest investment banks on Wall Street, was short of cash. i. Bear Stearns had lots of assets – mortgages and mortgage- backed securities. (It can take 30-90 days to convert mortgages into mortgage-backed securities, and then often 30-90 days to sell the mortgage-backed securities. During this time the investment bank owns the mortgages.) ii. But Bear Stearns’ assets were illiquid – they could not easily be sold. And Bear Stearns was highly leveraged – it borrowed a great deal of money, primarily in short-term debts (including in the overnight repo market), in order for Bear Stearns to have sufficient cash to support its operations. h. AND that takes us to the video … 4 2. INSIDE THE MELTDOWN. Please watch the PBS Frontline Video, “Inside the Meltdown” (Feb. 17, 2009) (56:20). The video can be found at If the link does not work for you, please search for the video online. As you watch the video, ask yourself these questions: a. What would have happened if Bear Stearns was allowed to fail? If Bear Stearns had been allowed to fail, it could have potentially dragged down Wall Street due to systemic risk. b. Understanding the Federal Reserve Bank’s Loan (“Bailout”) Involving Bear Stearns. i. To facilitate the acquisition of the Bear Stearns Companies, Inc. by JPMorgan Chase & Co., the Federal Reserve Bank of New York (FRBNY) created and extended credit to Maiden Lane LLC. Maiden Lane LLC is a limited liability company (LLC) formed to acquire certain assets of Bear Stearns and to manage those assets through time to maximize the repayment of credit extended to the LLC and to minimize disruption to financial markets. ii. On June 14, 2012, the FRBNY announced that its loan to Maiden Lane LLC has been repaid in full, with interest. This repayment marks the retirement of the remaining debt owed to the FRBNY from the crisis-era intervention with Bear Stearns. c. The Treasury Secretary (Henry Paulson) warned “Wall Street” – the investment banks – that future bailouts would not happen. The desire was to avoid “moral hazard.” i. Moral hazard describes a situation in which a party is insulated from the consequences of its actions. Thus protected, it has no incentive to behave differently. Insurance companies coined the 5 term to describe someone who, for instance, takes out a big auto policy, then leaves his car unlocked. If the car is stolen, the insurance company – and its other customers – pay the price for the reckless behavior. ii. In the case of Bear Stearns, critics have said that such highflying investment banks would continue to engage in risky activities with investors' money, knowing that if they blow it, the federal government (i.e., taxpayers) will bail them out. iii. Can you describe “moral hazard” in your own words? Moral hazard is basically someone continuing to do a bad thing, because the punishment they received for the bad thing wasn’t enough to deter them from doing it again- rather, it encourages it. d. “The impact of the problems in the sub-prime [mortgage] market appears likely to be contained.” – said Federal Reserve Chair Ben Bernanke. Do you think he believed what he was saying? I don’t think so! He was an expert on the Great Depression, and was fully aware of the true impact that the interconnected systems could have on one another. i. The eventual losses in the US subprime market were around US$500bn. This is not loose change. But, as Ben Bernanke noted in a speech in 2012, neither is it a huge sum when compared with the total balance sheets of the largest banks. So why did the subprime losses trigger a global financial meltdown? Investors lost confidence in the markets. It wasn’t the amount being lost, but rather the fact that any amount could be lost by big organizations like these. It was scary, and that fear is what shook the market. People stopped lending to the banks. e. What is “systemic risk”? Explain this concept, as applied to the financial markets in 2009, in your own words. Systemic risk is basically all the big companies being so intertwined to the point that failure of one would lead to failure of them all. So in 2009, these companies were so inter-connected that if one bailed out, they would all face massive losses. f. On September 16, 2008, the Federal Reserve announced that it would lend to American International Group, Inc., (AIG) to provide AIG with the time and flexibility to execute a value-maximizing strategic plan. Initially, the FRBNY extended an $85 billion line of credit to the company. On October 8, 2008, the FRBNY was authorized to extend 6 credit to certain AIG subsidiaries against a range of securities. On November 10, 2008, the Federal Reserve and the Treasury announced a restructuring of the government's financial support to AIG. As part of this restructuring, two new LLCs were created and the line of credit extended to AIG was reduced by $25 billion. On November 25, 2008, the FRBNY began extending credit to Maiden Lane III LLC, a company formed to purchase multi-sector collateralized debt obligations (CDOs) on which the Financial Products group of AIG had written credit default swap and similar contracts. The FRBNY's loans to Maiden Lane II LLC and Maiden Lane III LLC were repaid in full, with interest, on March 1, 2012, and June 14, 2012, respectively. These repayments marked the retirement of the remaining debt owed to the FRBNY from the crisis-era intervention with AIG. g. On the weekend before the bankruptcy of Lehman Bros., a large investment bank, the message to Wall Street’s investment banks was that the government would not bail out Lehman Bros. The investment banks were told to arrange a buyer for Lehman Bros. – without the support the federal government had given in the sale of Bear Stearns. No buyers emerged for Lehman Brothers. h. Here’s one explanation of the cause of the “financial crisis”: “[S]ubprime losses led to a financial crisis in 2008 because the banks were more highly leveraged relative to their capital and also, crucially, more dependent upon short-term funding markets. The 2008 financial crisis was, above all else, a crisis in and of the wholesale funding markets which arose when institutional investors stopped lending to any banks at any price in the knowledge that some of those banks (they did not know which) had incurred losses in the subprime market that would be enough to wipe out their inadequate capital buffers.” Source: real-culprit-in-the-2008-financial-crisis-and-with-banks-continuing-to- borrow-huge-amounts-the-dangers-are-still-there/ i. When banks stop lending to other banks, for fear of counterparty risk, the availability of credit “froze.” 3. The financial crisis continued, after the video ends. a. Capital injections continue - The federal government imposed restrictions on banks, and forced them to accept government loans to shore up their capital. b. Stock prices fell in early 2009, with the lowest values of the various stock indices seen on or about March 9, 2009. 7 (Yet, as I am writing this on August 5, 2016, the S&P 500 stock index, an index consisting of the prices of the stocks of 500 of the largest U.S. publicly traded companies, has reached an all-time high.) c. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was passed. Its provisions are still being implemented by various government agencies. d. The Volcker Rule, part of Dodd Frank, prohibits banks from engaging in certain activities that could pose severe risks to the banks’ capital. The rule did not take effect until July 21, 2015. i. Even today, fears exist that some of the investment banks (and commercial banks) may be “undercapitalized” or taking on too much risk. This is particularly true in Europe. Notes from the video There was a rumor about Bear Stearns- that it was running out of cash- stock price dropped $100 Had $18 billion in cash reserves- CFO says everything is fine Massive investments in subprime mortgages “toxic assets” Buy hundreds of thousands of mortgages and bundle them into securities to sell to investors Accelerating housing prices created a mentality that housing price could only go up 2007: foreclosures began to rise, stuck with investments that were declining in value Alan Schwartz CEO of Bear Stearns- had to reassure the market 1. One of Bear’s most important trading partner – Goldman Sachs- might be abandoning them (not trustworthy in the eyes of those they trade with) Bear had borrowed heavily to invest in high-risk securities 8 Rolls over loans in repo market – but markets voted no confidence in Bear Stearns Stock dropped and cash reserves began to dwindle They didn’t have enough money to open the next trading day Federal Reserve Bank of NY- found billions in hidden subprime mortgage loans and credit default swaps (promised that bonds they insured failed, that they would) Credit default swap- I sell you insurance on a bond, bond goes belly up, I’ll pay you, and otherwise, you pay me for insurance Bear Stearns failure to pay their debts would call a cascade of other failures- drags down Wall St Systemic risk- Bear was interconnected to other banks in a dangerous way Ben Bernanke- risk to the financial system as whole would be too great if Bear went bankrupt Fed couldn’t directly lend cash to Bear (unregulated investment bank) They decided to give a loan to JP Morgan who would then give it to Bear Federal Reserve bailing out Bear and using JP Morgan to do it Singling them out gave them a death sentence- 50% sell off in Bear Henry Paulson- potential failure of other investment banks (Lehman Brothers, Goldman Sachs) Bernanke married JP Morgan and Bear- guaranteed a $30 billion DOW rate to secure assets Paulson warned Wall St that this will not happen again “moral hazard” Moral hazard- if you bail someone out, why would they change their ways next time? Believed best government was no government- free market 30% of Bears stock held by own employees- JP Morgan offered $4 per share, Paulson wanted $2 Wanted it to be very painful for Bear shareholders- sold to JP Morgan for $2 per share People were taking mortgages that they couldn’t afford- no one cared if they could afford payments Act of buying house meant that you were going to get rich- government didn’t care Impact of subprime contracts were going to be contained- not going to effect the rest of the economy Summer of 2008- toxic mortgages ate away at firms (trillion dollars of losses) Fannie Mae and Freddie Mac- largest mortgage lenders in the world Lost 60% of their stock value in 2 weeks Created by government for affordable housing Possible failure was a huge systemic risk Bernanke nationalized Mae and Mac and took over the day-to-day operations 2 of largest companies on earth can fail- anyone can fail 9 Lehman Brothers- they had a really good CEO (longest serving) but had become arrogant Pushed the envelope on acceptable home loans Stock began to plummet – largest crisis Wall St has seen since Great Depression Thought government would never let Lehman fail- larger firm, more interconnected Moral hazard drew Paulson’s decision- he wanted the Lehman CEO (Dick Fauld) to sell the company Lehman will be allowed to fail- wanted to show that Wall St had to handle own problems Federal Reserve NY summoned all the big banks- “there would be no bail out” The banks had a find a way to resolve the problem for all of Wall St But there was no government assurance Moral hazard TRUMPED systemic risk- the government would not intervene Stock market dropped- Lehman Bros was super connected- systemic risk was a BIG deal Banks stopped lending and the credit market froze Commercial banks were affected by the decisions of the investment banks Crisis began because the Lehman Bros went into bankruptcy Credit markets frozen- AIG (largest insurance company) had invested billions in the housing market AIG didn’t have the $ in the bank to support their commitments Sold credit-default swaps (basically said that Lehman will never go bankrupt) Promised to pay people if Lehman went bankrupt!! Needed cash but the credit markets were frozen- needed Paulson and Bernanke So much for moral hazard- CANNOT let AIG fail, even though it was immoral Lent AIG $85 billion- government now owned 85%of world’s largest insurance company Had the government lost control of the situation? - reacting instead of acting Bernanke wanted to do a full scale bailout of the financial system Plan was a $700 million request to taxpayers to bail out these banks- needed it by Monday Paulson wanted to buy the toxic assets from the banks Congress did not pass the bill- the market crashed Capital injection- inject billions of dollars into failing banks to boost confidence and unfreeze credit – was secretly inserted into the bill Systemic risk went global- Paulson had to do capital injection into the banking system 10 Planned a meeting w the largest 9 banks- told them entire banking system was in deep trouble Told them he would give them $10s of billions for the gov to be a major shareholder Spent $125 billion- moral hazard was a thing of the past Paulson replaced by Tim Geightner (president of Federal Reserve NY) $350 billion spent to save financial system, and will spend trillions more- but will it be enough Understanding the Taxation of Corporate Profits Because it’s not how much you make, but how much you keep, that counts! Ordinary income- the amount someone makes from job in a given year Marginal income tax rate- tax rate on the next dollar that you make Average income tax rate- tax due / taxable income Interest income- how much you collect annually from interest on savings Dividend income- how much is earned annually from dividends Qualified dividends vs. non-qualified dividends (received by individuals) - receive special tax treatment if your dividend income exceeds a certain number “Double taxation” of dividend income received by individuals- Corporation is taxed once on profits, then the stockholder is taxed on their dividend Dividend received deduction (DRD) – mitigates the multiple taxes on dividends (less than 20% ownership results in a 70% deduction on dividends So if you had a dividend of $20,000 with a 5% ownership stake, $14,000 of that dividend would be excluded from taxation. So $6,000 is taxed at 34% (income = 400,000) which would result in a tax cost of $2,040 and an after- tax of $17.960 Corporate tax deductions of operating and interest expense- can deduct operating expenses and interest expenses from taxes to reduce the after tax cost Capital gains- when you sell a home, household furnishings, bonds, or stocks for a price greater than you bought it for Capital losses- when you sell a home, household furnishings, bonds, or stocks for a price less than you bought it for Long-term vs. short-term capital gains and losses Short-term is taxed at a higher rate because you pay regular/ordinary income tax rates Long-term are taxed at rates of 0%, 15%, or 20% depending on your tax bracket Federal income tax vs. state income tax Long term capital gains and qualified dividends are taxed as ordinary income for states 11 Learning Objectives: (1) Understand the fundamentals of taxation of (large) corporations, in order to learn how corporations might adjust their sources of capital based upon tax considerations. (2) Learn how individual investors in (large) corporations are taxed, and why they might prefer (from a purely tax perspective) to not receive dividends. Generation: Can you already explain these terms and concepts, prior to the readings and videos? Ordinary income- the amount someone makes in a given year Marginal income tax rate- Average income tax rate- Interest income- how much you collect annually from interest on savings Dividend income- how much is earned annually from dividends Qualified dividends vs. non-qualified dividends (received by individuals) “Double taxation” of dividend income received by individuals- corporation is taxed once on profits, then the stockholder is taxed on their dividend Dividend received deduction (DRD) (for corporations) 12 Corporate tax deductions of operating and interest expense Capital gains Capital losses Long-term vs. short-term capital gains and losses Federal income tax vs. state income tax 1) Please review this chart: U.S. (FEDERAL) INCOME TAX RATES (2016): Corporate Federal Income Tax Rates (Ordinary Income) Taxable income over Not over Tax rate $ 0 $ 50,000 15% 50,000 75,000 25% 75,000 100,000 34% 100,000 335,000 39% 335,000 10,000,000 34% 10,000,000 15,000,000 35% 15,000,000 18,333,333 38% 18,333,333 .......... 35% 2) Please watch this video: “How to calculate corporate taxes due plus average tax rate and marginal tax rate” (9:44): v=irTBAnxYuK4 from financecanbefun's channel After watching the video, do you fully understand the distinction between average tax rates and marginal income tax rates? Taxable income of $20,000 0 – 50k: 15%  20k x .15 = $3000 Average tax = tax due / taxable income 3,000 / 20,000 = 15% - all income taxed at 15% Marginal rate- what the next dollar would be taxed at- still at 15% Taxable income of $120,000 100k to 335k: 39% - add in the potential tax liab for previous (50k x . 15 + 25k x .25 + 25k x .34 = 7500 + 6250 + 8500) Take taxable income and subtract from lowest number in bracket 120,000 – 100,000 = 20,000 x .39 = $7,800 Taxes owed = 30,050 Average tax = 30,050 / 120,000 = 25% Marginal rate = $120,001 is still in the same bracket – 39% Taxable income of 400,000 335k to 10 million Add up all the potential liabilities (50k x .15 + 25k x .25 + 25k x .34 + 235k x .35) 400,000 – 335,000 = 22,100 136,000 total taxes due Average tax = 136000 / 400000 = 34% Marginal tax is still 34% 13 Average tax rates are your total taxes paid divided by your total income- it is the average tax rate that you’re paying. Marginal tax rates are the tax that you would pay on the next dollar of income. 3) Corporations also pay state income taxes on their taxable income (generally, profits) in most states. Here are Kentucky’s state income tax brackets: 2015 Kentucky Income Tax Table for Individuals (Single or Married Filing Jointly) (Based on taxable income) Tax Bracket  Marginal Tax  Tax Bracket  Marginal Tax  (Single) Rate (Married) Rate $0 to $3,000 2.00% $0 to $3,000 2.00% $3,000 to $4,000 3.00% $3,000 to $4,000 3.00% $4,000 to $5,000 4.00% $4,000 to $5,000 4.00% $5,000 to $8,000 5.00% $5,000 to $8,000 5.00% $8,000 to $75,000 5.80% $8,000 TO $75,000 5.80% $75,000+ 6.00% $75,000+ 6.00% 2015 Kentucky state income tax rate for C corporations taxable net income up to $50,000 taxed at 4% taxable net income over $50,000 up to $100,000 taxed at 5%; and taxable net income over $100,000 taxed at 6%. Most, but not all, states impose taxes on personal income (received by individuals, couples) and  on the income received by corporations. 4) State and local taxes represent a significant business cost for corporations operating in the United States and can have a material impact on net operating margins. Consequently, business location decisions for new manufacturing facilities, corporate headquarter relocations, and the like are often influenced by assessments of relative tax burdens across multiple states. View the map on the next page for a simplistic overview of state income taxes. 14 Note: Some states do not levy a corporate income tax at all, but instead levy gross receipts taxes (which  can be more harmful for corporations that are not hugely profitable). Ohio levies the Commercial Activities Tax (CAT). The first $1 million in taxable gross receipts are taxed at $150. Receipts above $1 million are taxed at 0.26% Texas levies the Margin Tax on corporate profits, at the rate 0.475% for businesses engaged in retail or  wholesale trade and for other taxable entities at a rate of 0.95%. Washington levies the Business and Occupation (B&O) tax. Virginia and Delaware levy both gross  receipts taxes and corporate income taxes. South Dakota and Wyoming do not levy a corporate income tax or a gross receipts tax. 5) Please read Section 2.4 from the textbook, “Business Taxes” Income of sole proprietorships and partnerships is taxed as the income of owners; corporate income is subject to corporate taxes. 15 Business can earn 2 types of income Ordinary gains- earned through the sale of goods or services Ex. earnings of $250,000 total taxes due are $22,250 + [0.39 x (250,000 – 100,000)] = $80,750 Range of Taxable Base Tax + Marginal Rate x amount over base Income bracket 0 to 50,000 0 + 15% x amount over $0 50k to 75k 7500 + 25% x amount over 50k 75k to 100k 13,750 + 34% x amount over 75k 100k to 335k 22,250 + 39% x amount over 100k 335k to 10 million 113,900 + 34% x amount over 335k 10 million to 15 3.4 million + 35% x amount over 10 million million 15 million to 5.15 + 38% x amount over 15 million 18,333,333 million Over 18,333,333 6,416,667 + 35% x amount over 18,333,333 Marginal tax rate- rate at which the next dollar of income is taxed – so if you earned $250,001, that last dollar would be taxed at 39% [this is what really matters] Average tax rate- taxes paid / taxable income Interest received by corporation is included in ordinary income But, dividends are subject to double taxation- corporation pays earnings tax, shareholders pay tax too Tax Deductible expenses- can deduct operating expenses and interest expense from taxes to reduce their after tax cost Debt No-Debt Co Co Earnings before interest and 200k 200k taxes Less: interest expense 30k 0 Earnings before taxes 170k 200k Less: taxes (40%) 68k 80k Earnings after taxes 102k 120k Difference in earnings after 18k 18k taxes Debt Co had 30k more interest expense but their earnings are only 18k less. This is because the interest expense deduction provided a tax savings of 12k (.4*30k) and the after-tax cost is 1 – tax savings, or 18k Tax savings for debt co = 0.40 x 30k =12,000 Interest is a tax deductible expense; earnings are not Capital gains Difference between sale and purchase price of an asset- added to ordinary income and taxed at regular corporate rates 16 Ex. capital gains of $25k on an asset bought for $150k but sold for $175k- adds 25k on income 6) Please watch this video: Corporate Taxes Dividends Received Deduction v1 (5:44) by Ed Kaplan: v=xGjjo1At2Iw&list=PLfTs3cOraN5VlzXllqmvmMeJjQFuEUenX&index=6 Dividend received deduction- mitigate multiple taxation on dividends- causes none or only some of the dividend to be taxable to the recipient corporation Amount deducted based on % ownership by corporate shareholder Less than 20% ownership- deduction 70% 20% - 80% ownership- deduction 80% 80% or more ownership- deduction 100% DRD cannot exceed taxable income limitation = taxable income x corresponding deduction percentage 1. Multiply the dividends received by the deduction percentage 2. Multiply the taxable income by the deduction percentage 3. Limit the deduction to the lesser of step 1 or 2, unless step 1 results in a NOL, if so, the amount in step 1 is used [NOL rule] Red White Blue Gross income from $400,000 $320,000 $260,000 op Expenses from op (340,000) (340,000) (340,000) Dividends 200,000 200,000 200,000 received (less than 20% own) Taxable income 260,000 180,000 120,000 before div rec. deduct Determining the dividends received deduction Step 1: multiply the dividends by the deduction percentage (70% x $200,000) $140,000 $140.000 $140,000 Step 2: multiply by the taxable income by deduction percentage 70% x $260,000 $182,000 70% x $180,000 $126,000 70% x $120,000 $84,000 Step 3 Lesser of step 1 or 2 $140,000 $126,000 $140,000* Deduction results in NOL White does not qualify for NOL rule because subtracting $140,000 from $180,000 (taxable income before DRD) is not negative *Blue qualifies for NOL because subtracting $140,000 from $120,000 yields a negative figure 17 7) Understanding the federal income tax on capital gains and qualified dividends, as to their receipt by individuals. Qualified dividends: “Taxes on Dividends Explained - TurboTax Tax Tips Video” (3:11) 1099-DIV has numbered boxes to determine tax paid on dividend paid throughout the year 2a: long term capital gains 1a: total ordinary dividend income  1b reports the qualified dividends that receive special tax treatment- taxed on capital gains rate Highest tax rate you qualify for is 15%- no tax; above that, you are taxed 15% Schedule B w tax return if your dividend payment exceeds $1,500 Capital Gain Taxes: The IRS considers the following as Capital Assets: Your home, household furnishings, bonds and stocks you own. When you sell a capital asset, the difference between the amount you sell it for and your basis, which is usually what you paid for it, is a capital gain or capital loss. Capital gains and losses can either be long term or short term. If you hold it more than one year, it is a long term capital gain, if you hold it one year or less, your capital gain or loss is short term. Short term capital gains are taxed at a higher rate than long term capital gains. If you sell investments that were held for less than a year, you'll pay regular (ordinary) income tax rate on your gains (between 10% and 39.6%). Long term Capital gains are taxed at a rate of 0%, 15%, or 20% depending on your marginal tax rate. 8) NOTE: In most states, long-term capital gains and qualified dividends are taxed as ordinary income for state income tax purposes, when received by individuals. 18


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