Tax on liquidating dividend

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The tax rates for qualified dividends are (1) 0% for taxpayers with a marginal tax rate on ordinary income of 10% or 15%; (2) 15% for taxpayers with a marginal tax rate on ordinary income of 25% or greater whose taxable income falls below the levels for the 39.6% regular tax rate (2014 inflation-adjusted 7,600 for married filing jointly, 6,750 for single filers, and 8,800 for married filing separately); and (3) 20% for taxpayers with taxable income above those levels.

Individuals with modified adjusted gross income above a certain threshold (0,000 for married filing jointly, 0,000 for single filers, and 5,000 for married filing separately) may also owe the 3.8% net investment income tax (Sec. Net investment income includes dividends less expenses properly allocable to the dividends.

This means tax will be payable at rates from 25% to 36% depending on the individual circumstances, rather than potentially at a rate of 10% if distributed as capital.

The news of this change inevitably created something of a rush as companies tried to benefit from a last minute tax planning opportunity.

Whilst it is now too late to make a new application for this facility and benefit from the old rules, there are still options to consider going forward.

We therefore thought it useful to explain what the rules are on the informal closure of a limited company, where this is undertaken under HMRC extra statutory concession 16 (ESC C16), and provide you with some advice on what to do in the future should the need to dissolve a company arise.

Also a distribution of assets from a company that is going out of business.

The shareholder must calculate a capital gain or loss on the part-disposal by apportioning the base cost of the share according to the ratio of the market values of both the capital distribution and the share, and treating the capital distribution as the proceeds on the part-disposal.

The method of calculation may have the anomalous effect of creating taxable capital gains upon the receipt of, for example, a liquidation distribution comprising retained earnings and a portion of the originally contributed capital.

If the total liquidating distributions you receive are less than the basis of your stock, you may have a capital loss.

The distribution of profits by a company being liquidated, wound up or deregistered is considered to consist of dividends to shareholders and a return of their investment in the company.

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