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What are substitute payments in lieu of dividends, and how are they taxed?

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Substitute payments in lieu of dividends may be generated where, for example, a security has been lent to a third party (such as a broker) over a dividend record date. If an investor has a margin account debit balance, securities in the account are often eligible to be lent to a broker. If the shares are lent over a record date, the investor should receive a substitute payment equivalent in amount to the dividend but taxable at ordinary income tax rates. Prior to the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), substitute payments and actual dividends were both taxed at the federal level as ordinary income. JGTRRA introduced lower federal rates for qualified dividend income; however, substitute payments are not taxed as qualified dividend income and are instead still taxed at ordinary income rates as high as 35%. Substitute payments in lieu of dividends are reported on Line 8 of Form 1099–MISC. more
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Substitute payments in lieu of dividends may be generated where, for example, a security has been lent to a third party (such as a broker) over a dividend record date. If an investor has a margin account debit balance, securities in the account are often eligible to be lent to a broker. if the shares are lent over a record date, the investor should receive a substitute payment equivalent in amount to the dividend but taxable at ordinary income tax rates. Prior to the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), substitute payments and actual dividends were both taxed at the federal level as ordinary income. JGTRRA introduced lower federal rates for qualified dividend income; however, substitute payments are not taxed as qualified dividend income and are instead still taxed as ordinary income rates as high as 35%. Substitute payments in lieu of dividends and tax-exempt interest are reported on line 8 of Form 1099-MISC. Substitute payments in lieu of other items may ...
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