Annual Credit for Substitute Payments

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If shares were lent from your margin account during a period in which they would have earned dividends, you'll receive substitute payments to help make up for the lost income.

However, unlike dividends, these substitute payments are taxed as regular income, with a tax rate as high as 37%. To help cover this additional expense, we offer the annual credit.*

Who qualifies for the annual credit

You may be eligible to receive the annual credit if:*

You are a U.S. citizen or permanent resident.
You received the substitute payment in an account registered as individual, joint, trust, estate, or "pass-through" entity type (partnership, LLC, LLP, etc.).
You would have reported the dividend as a qualified dividend had the security not been on loan. (In general, you will be able to satisfy this requirement if the applicable security is from either a domestic or qualified foreign corporation, and would have been held unhedged for the period required for qualified dividends.)

When you’ll receive your credit payments

Credits are paid between March and May of the following calendar year, or as soon as all reclassification information is available. Please note, in order to receive your credit, your account, or a qualified substitute, must be open.

How we calculate your credit

In general, your credit will be approximately 26.98% of your total substitute payments. For example, if you received $100 in substitute payments for the entire year, your annual credit adjustment will be $26.98.

We base this percentage on a number of factors. For instance, we assume your substitute payment will be taxed at the highest federal tax rate (37%) and then make further adjustments to account for any taxes the annual credit may incur.

Where to find credits and substitute payments on your tax return

We list substitute payments on line 8 and annual credits on line 3 of Form 1099-MISC.

When filing your federal tax return, we recommend listing the credits as "other income." For additional help on how to report credits or substitute payments, please consult your tax advisor.