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Fidelity's New Customer Friendly Move

Contributed by mm | April 24, 2004 9:44 PM PST

Fidelity is always more customer friendly than many other peers. It recently announced an annual credit adjustment program that will compensate customers for their loss of preferred tax treatment of dividends when their stocks are loaned out.

When there is a debit balance within a margin account, a customer's shares may be borrowed by brokerage to faciliate some short-selling. When a dividend is issued and a customer's shares are on loan, the customer will get a substitute payment that equals to the dividend. However, substitute payment cannot enjoy the preferred tax treatment like a qualified dividend, causing additional tax burden for the customer. (See more details in my previous post Your Dividend Income May Not Enjoy The Tax Break.)

Starting from 2004, Fidelity will issue an annual credit adjustment to offset any additional federal tax burden. Because the substitute payment can be taxed as high as 35%, qualified dividend can be taxed at a preferred 15% rate, and any adjustment itself is subject to tax, Fidelity will issue adjustment that equals 30.77% of the substitute payment (30.77% * (1- 35%) = 35% - 15%). Under this program, if one's tax bracket is less than 35%, he/she can even make some money out of the credit adjustment.

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