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Lane
Lane, JD, CFP, MBA, CRPS
Category: Capital Gains and Losses
Satisfied Customers: 12659
Experience:  Have been providing Financial and Tax advice for 30 years.Concentration in Corporations, Estate, Income Tax and Business Planning
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My income for the last several years has been 40,000 thru

Customer Question

My income for the last several years has been 40,000 thru dividends only as I am retired. I never had to pay any federal income tax on this amount because it was treated not ordinary income, Yesterday, I received 47,000 in cash from the merger of RJ Reynolds and British American Tab. Will I now have to pay taxes on the 40,000 in dividends plus the cash I received of 47,000. My total income has gone up to 87,000 this year and I did not send in quarterly est. tax withholding because I did not have to pay any taxes for the last few years and I did not know about this 47,000 cash distribution.
JA: The Accountant will know how to help. Is there anything else important you think the Accountant should know?
Customer: yes, is this cash distribution treated as a short term or long term capitol gain as I bought RJ Reynolds many years ago?
Submitted: 2 months ago.
Category: Capital Gains and Losses
Expert:  Lane replied 2 months ago.

Hi. This is a purchase transaction so a capital transaction, so for you a capital gain.

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You'll be taxed under the rules for mergers/buyouts where at least some of the consideration is cash.

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First, the overall gain you have on the exchange. To do this, you need to know the value per share of the merger consideration, including both shares and stock. Generally the company gives you this information at the time of the merger, in a statement of information.

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If you can't find this information, it's likely to be on the company's web site. Multiply that figure times the number of shares you held to determine the total consideration you received. Then subtract your total basis in the shares you held to get the overall gain.

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Under this rule, the amount of gain you report is the lesser of the amount of gain from above, or the amount of cash you received.

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But yes, if you help the shares given up for more than one year this will be taxed at the lower long-term gains rate.

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And yes, you have likely been at the zero tax rate on the dividends in prior years, becasue of your total taxable income ... But, even though your total taxable income will be higher, you'll still get the standard deduction, and personal exemption, meaning that SOME of the dividends and gain will still be at that zero percent rate.

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Long-term gains and qualified dividends are taxed as follows:

  • 0% if taxable income falls in the 10% or 15% marginal tax brackets
  • 15% if taxable income falls in the 25%, 28%, 33%, or 35% marginal tax brackets
  • 20% if taxable income falls in the 39.6% marginal tax bracket
Expert:  Lane replied 2 months ago.

I'm attaching a chart that may help to illustrate how gains & dividends work WITH ordinary income. But again, you'll still get the standard deduction and personal exemption(s) AND some of the income will be taxed at the zero rate.

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Married Filing Jointly, or Qualifying widow(er)

[Tax Rate Schedule Y-1, Internal Revenue Code section 1(a)] Married Filing Jointly 2017 Tax Brackets

Taxable Income ......Tax Bracket:

$0-$18,650 ............. 10%

$18,651-$75,900 ..... 15%

$75,901-$153,100 .... 25%

$153,101-$233,350 .. 28%

$233,351-$416,700 .. 33%

$416,701-$470,700 .. 35%

$470,701+ .............. 39.6%

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But as you can see, much of this will be in the 10 and 15% taxable income brackets, meaning thatonly a small portion will fall into the 25% ordinary, hence 15% long term capital gains rate.

Expert:  Lane replied 2 months ago.

If you file as a single filer, more of the income will be taxable, becasue of the lower standard deductions and lower brackets.

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Single Filing Status

Single 2017 Tax Brackets

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Taxable Income ........ Tax Bracket:

$0 - $9,325 .................. 10%

$9,326 - $37,950 .......... 15%

$37,951 - $91,900 ........ 25%

$91,901 - $191,650 ...... 28%

$191,651 - $416,700 .... 33%

$416,701 - $418,400 .... 35%

$418,401+ ................... 39.6%