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Champ received a $10,000 distribution from NeatCo, a U.S. C corporation. NeatCo's earnings and profits for...

Champ received a $10,000 distribution from NeatCo, a U.S. C corporation. NeatCo's earnings and profits for the year totaled$6,000. How much dividend income does Champ recognize? What Federal tax rate applies to the dividend if Champ's ordinary income is subject to a 15% tax rate? A 33% tax rate?

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Answer #1

Champ has $6,000 of dividend income from the distribution (a dividend to the extent of the corporation’s earnings and profits).

If Champ’s ordinary income tax rate is 15%, his capital gain rate for qualified dividend income is 0 percent.

If the ordinary income tax rate is 33%, the qualified dividend is taxed at the 15% capital gains rate. The additional $4,000 that Champ received as a distribution is a nontaxable return of his basis in the NeatCo stock (assuming Champ’s basis is at least $4,000 prior to the distribution).

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