Buying a dividend causes an investor to pay taxes on a return of their capital. To avoid an unnecessary tax bill, investors must deduct the portion of their distribution income that represents a return of their capital from their total income distribution.
The tax deduction calculation on the DistributionRisk Analytics Dashboard shows the amount of money an investor would need to deduct from their total income distribution to avoid being over-taxed. For example, if an investor receives a $1.00 per share distribution and $.50 of this distribution represents the dividends they “bought” and are now being returned to them (aka return of capital), then the investor must deduct this return of capital amount from the total distribution to avoid being overtaxed. This math is necessary to arrive at accurate taxation of income. This investor should not pay taxes on a $1.00 per share distribution. The investor should pay taxes on a $.50 share distribution ($1.00 – $.50 = $.50).
Can I claim this tax deduction calculation on my taxes?
Unfortunately, it is not that simple. Numerous factors need to be considered to deduct this amount correctly. This requires complex math, tax lot level accounting, basis adjustments, and consideration of the type of income distribution, holding periods, and other factors.
OK then, how can I protect myself from overpaying on my taxes?
FairShares has developed a product called RoboTax. RoboTax analyzes all of your transactions, applies tax rules, claims accurate deductions, and adjusts your 1099-DIV so that you are taxed accurately. We have made this product available to asset managers, custodians, and brokers, but they think their current business practices costing you money are “perfectly fine.” We disagree with their position. If you disagree too, let your broker, financial advisor, or asset management firm know you want RoboTax.
In the meantime, we are working hard on ways we can give you direct access to RoboTax via FairShares.com.