Feb. 1–The tax rate on dividend income has been cut to 15 percent–a nice break for investors.<\/p>\n
But here’s an important question: Do you know where your stocks are? Wall Street has some explaining to do.<\/p>\n
You won’t get a break if your broker or mutual fund has lent the shares to someone else–a thriving business on Wall Street. Typically, shares are lent to traders who sell them–so-called short-sellers.<\/p>\n
When your shares are lent, you receive a “payment in lieu of dividends,” which does not qualify for the tax break.<\/p>\n
“This is going to heighten the awareness of the client who never had given a thought to the fact that shares are lent out,” said Beth Clark Rodriguez of J.P. Morgan Private Bank.<\/p>\n
New IRS rules require brokers and funds to tell customers which portion of investment income qualifies for the dividend break and which does not.<\/p>\n
If you have a brokerage margin account, wherein your stocks are held as collateral against loans, your shares can be lent, denying you the break.<\/p>\n
Brokers and securities custodians–not you–make money on these loans.<\/p>\n
If you’re concerned, “get a hold of your broker and get out of the margin account,” said accountant Michael Dicker at Topel Forman.<\/p>\n
Mutual funds frequently earn income by lending shares. That income may offset fund expenses and thereby benefit customers, regardless of tax effects.<\/p>\n
But you have a right to know why you didn’t get a tax break you were expecting.<\/p>\n
“The mutual fund board of trustees needs to [ask], is securities lending in a specific mutual fund in the best interests of the clients in that fund?” said Michael Vardas, head of global securities lending at Northern Trust.<\/p>\n
“Our board has chosen not to lend securities,” said Gwen Shaneyfelt, executive director for taxes at Van Kampen Funds.<\/p>\n
Gus Sauter, chief investment officer at Vanguard Group, engages in securities lending. He called short-selling “a short-term liquidity force in the market” that benefits investors.<\/p>\n
As with everything involving taxes, this is a complicated subject. But a few facts are clear:<\/p>\n
More companies are initiating or boosting dividends, in light of the tax break, corporate scandals and Baby Boomers seeking investment income.<\/p>\n
At the same time, the growth of hedge funds and other investment schemes engaged in short-selling has enlarged the market for lending securities.<\/p>\n
Increasing demand by short-sellers to borrow relatively scarce small and medium-size dividend-payers creates special risks for investors employing small-cap value strategies.<\/p>\n
Margin accounts are booming, especially at online brokers. Day-traders probably can kiss the dividend tax break goodbye.<\/p>\n
The IRS is giving Wall Street and investors a one-time pass for 2003 taxes. If brokers are unable to specify qualified dividends, you may assume you qualify for the break.<\/p>\n
You’re on your own in determining whether you held the stock long enough to qualify. You must own the stock for more than 60 days of a 120-day period that begins 60 days before the ex-dividend date.<\/p>\n
Not all “dividends” qualify for the tax break. Dividends on most preferred stock and shares of real estate investment trusts are excluded, for example.<\/p>\n
—–<\/p>\n
To see more of the Chicago Tribune, or to subscribe to the newspaper, go to http:\/\/www.chicago.tribune.com\/<\/p>\n
(c) 2004, Chicago Tribune. Distributed by Knight Ridder\/Tribune Business News.<\/p>\n
JPM,<\/p>\n","protected":false},"excerpt":{"rendered":"
Feb. 1–The tax rate on dividend income has been cut to 15 percent–a nice break for investors. But here’s an important question: Do you know where your stocks are? Wall Street has some explaining to do. You won’t get a […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3],"tags":[],"class_list":["post-2266","post","type-post","status-publish","format-standard","hentry","category-hedgeco-news"],"_links":{"self":[{"href":"https:\/\/staging.hedgeco.net\/news\/wp-json\/wp\/v2\/posts\/2266","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/staging.hedgeco.net\/news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/staging.hedgeco.net\/news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/staging.hedgeco.net\/news\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/staging.hedgeco.net\/news\/wp-json\/wp\/v2\/comments?post=2266"}],"version-history":[{"count":0,"href":"https:\/\/staging.hedgeco.net\/news\/wp-json\/wp\/v2\/posts\/2266\/revisions"}],"wp:attachment":[{"href":"https:\/\/staging.hedgeco.net\/news\/wp-json\/wp\/v2\/media?parent=2266"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/staging.hedgeco.net\/news\/wp-json\/wp\/v2\/categories?post=2266"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/staging.hedgeco.net\/news\/wp-json\/wp\/v2\/tags?post=2266"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}