I guess this is just more of me being "educated" as to the intricacies and pitfalls in the murky world of investing and the US income tax code.
Today I checked my brokerage account and saw that I received my quarterly dividend from the small lot of JNJ shares that I own (or thought I owned.) Apparently, among the huge stack of paperwork I signed when opening my brokerage account, one of the things I agreed to was allowing the brokerage to lend out my shares to other people who may want to sell them short. I suppose that this normally wouldn't be a big deal, except for the tax consequences on the dividends.
Apparently, I did not receive an actual dividend from JNJ. Instead, I received a "payment in lieu of dividend / substitute payment" -- it says so in my account activity log. I was a little puzzled when I saw that line item, as it had never happened to me before. I had never heard of such a thing, so I went to Google to see what it meant. Well, according to a fool.com article that I found, the "payment" I received is NOT eligible for the preferential treatment for "qualified" dividends. instead, it is reported on 1099-MISC and is fully taxable at my highest income tax bracket rate.
I thought I knew quite a bit about the in's and out's of investing and I know a fair amount more about the US income tax code than most other people who I converse with. However, I had never even heard about this or thought it could possibly be an issue for me, until it blindsided me. Luckily, my position in JNJ is relatively low compared to the rest of my portfolio, so the additional tax liability from this "dividend" payment will not be a big deal to me. This entire situation is very unsettling to me, though. I may even consider shopping around for a new broker, and this will definitely be one of the things to check into before signing on the dotted lines when opening an account!