Your client's 1099 shows $14,000 in REIT dividends, $6,000 in qualified dividends, and $2,400 in municipal bond interest. She assumed they would all be taxed the same. The $3,200 difference proves otherwise.
Shareholders own a residual claim on earnings and assets. They stand last in liquidation, behind bondholders and preferred stockholders. Tax treatment hinges on the holding period.
Shares held longer than 12 months generate long-term capital gains (LTCG) taxed at 0%, 15%, or 20% depending on taxable income. Shares held 12 months or less produce short-term capital gains (STCG) taxed at ordinary income rates up to 37%. The Affordable Care Act (ACA) added a surtax on investment income of high earners to help fund Medicare. High earners face an additional 3.8% net investment income tax (NIIT) when MAGI exceeds $200,000 (single) or $250,000 (MFJ). Maximum effective LTCG rate: 23.8%.
HIGH-FREQUENCY: The 0%/15%/20% LTCG rate schedule and the NIIT thresholds ($200K/$250K) appear across D.27, E.36, and F.44.
Qualified dividends receive the same preferential rates as LTCG (0%, 15%, 20%) plus NIIT. To qualify, the payer must be a U.S.
Common mistakes
- Confusing the wash sale window. The rule uses 30 days before and 30 days after, plus the sale date = 61 days total. Not 60, not 90. Trap: "60-day window" omits the sale date.
- Applying qualified dividend rates to REIT distributions. Most REIT dividends are ordinary income. The 199A deduction reduces the effective rate, but the base rate is ordinary. Trap: $6,000 REIT yield taxed at 15% = $900 (wrong). Correct at 32% with 199A: $6,000 x 0.80 x 0.32 = $1,536.
- Forgetting OID creates annual taxable income. No cash changes hands, but tax is owed each year on the accrued discount. A zero-coupon bond generates phantom income every year. Trap: $0 current-year tax on a zero-coupon bond.
Bottom line
- LTCG/qualified dividends: 0%/15%/20% plus 3.8% NIIT above $200K single / $250K MFJ (max effective 23.8%).
- TEY = muni yield / (1 - marginal tax rate): never reverse it; multiplying instead yields a different number.
- REIT distributions split into ordinary (199A-eligible, max effective 29.6%), capital gains (LTCG rates), and return of capital that reduces basis.
- Wash sale window: 30 + 1 + 30 = 61 days; applies across all accounts including IRAs, and the disallowed loss adds to replacement basis.
Exam shortcut
Set up a three-column table when comparing yields: gross yield, applicable rate, after-tax yield. Corporate bonds use the ordinary rate. Munis use 0%. Qualified dividends use the LTCG rate. REITs use the ordinary rate reduced by 199A. DECISION: High federal + high state bracket → in-state muni; high state only → Treasury; tax-deferred account → corporate; low bracket → compare TEY directly.
The full lesson (about 2,453 words, 16 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- D.27
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