Chapter6_1of4 - 1 2 Sources of Income 2006 Percent of...

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Unformatted text preview: 1 2 Sources of Income 2006 Percent of Returns Showing Percent of All Income Reported Salaries and wages 84.09% 68.01% Taxable interest 45.09 2.77 Pensions & annuities 24.61 7.17 Dividends 22.85 2.48 Net capital gain 13.03 9.04 Schedule C 11.71 4.11 Social Security 9.93 1.80 Net capital loss 6.24-.23 Pshp & S corp income 5.51 5.30 Unemployment 5.33 .33 Tax-exempt interest 4.36 .91 Rent net income 4.18 .99 Rent net loss 3.87-.74 3 Dividends (22.85% and 2.48%) 5 Corporate Distributions Shareholder $$$ 6 Dividends General Rule Amounts considered dividends included in income Dividend defined: Distributions out of earnings and profits Current or accumulated E&P All distributions deemed to be out of E&P to extent thereof 7 Corporate Distributions Current and Accumulated E&P Capital Shareholder $$$ 8 Dividends Dividend defined: Distributions out of earnings (current or accumulated E&P) All distributions are out of E&P to extent thereof Treatment of dividends Ordinary income but Qualified dividends taxed at 15% or 0% rate Qualfied if: Dividends from all domestic corporations (big or small) Dividends from foreign corps if stock is readily tradable on an established U.S. securities market Holding period requirement more than 60 days during the 121-day period beginning 60 days before the ex-dividend date C corps deduct 70% of dividends received but no special rate 9 Dividends Dividend defined: Distributions out of earnings (current or accumulated E&P) All distributions are out of E&P to extent thereof Three tiers Dividend to extent of E&P C corps deduct 70% of dividends received but no special rate Amounts in excess of E&P Nontaxable return of capital to extent of shareholders basis in stock Basis of stock is reduced Amount in excess of basis is treated as capital gain Taxed at 15% or 0% rate Report on Schedule B if more than $400 10 Dividends Example S is the sole shareholder of C Corporation. C has E&P of $25,000. Ss basis in R stock is $10,000 C distributes $40,000 to S Tax consequences to S $25,000 ordinary income to extent of E&P $10,000 tax-free return of capital to extent of basis $5,000 Long Term Capital Gain Basis in stock is zero 11 Problem 6-19 Accumulated earnings and profits $20,000 Current earnings and profits $10,000 Distribution $40,000 Shareholders stock basis $25,000 Dividend Return of capital Capital gain Remaining basis 12 Problem 6-20 $15,000 Remaining basis $36,000 - $15,000 CEP 10,000 + AEP 20,000 40,000 $21,000 Sale Capital gain 10,000 Return of capital $30,000 Dividend 25,000 Shareholders stock basis 40,000 Distribution 10,000 Current earnings and profits $20,000 Accumulated earnings and profits 13 Mutual Funds Wha t a re m utua l funds ?...
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Chapter6_1of4 - 1 2 Sources of Income 2006 Percent of...

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