CMS

What are the tax implications for investors holding the cumulative preferred stock?

Created August 07, 2025 at 07:31 PM

Tax treatment of the 4.200 % Cumulative Redeemable Perpetual Preferred Stock (Series C) of CMS Energy

Below is a detailed, step‑by‑step look at the principal tax considerations that investors—both U.S. individuals and entities and non‑U‑S investors—should keep in mind when they hold this preferred‑stock dividend.

1. How the dividend is classified for tax purposes

Investor type	Typical tax classification of the preferred‑stock dividend
U.S. individuals	Ordinary (non‑qualified) dividend – taxed at the investor’s regular federal income‑tax rates (up to 37 % in 2025). It is not eligible for the lower qualified‑dividend rates (0 %, 15 %, 20 %).
U.S. corporations, partnerships, trusts, etc.	Interest‑like dividend (ordinary income) – treated as ordinary income on the entity’s tax return.
Foreign (non‑U.S.) investors	Subject to 30 % (or lower treaty‑reduced) withholding on the dividend unless the investor provides a valid Form W‑8BEN (or similar) to claim treaty benefits. The dividend is still considered ordinary income for the foreign taxpayer’s home‑country tax filing.

Why it’s ordinary (non‑qualified) dividend: Preferred‑stock dividends are generally treated as “portfolio‑interest” (i.e., a return on a debt‑like instrument) rather than “qualified dividend” income. The IRS specifically excludes most preferred‑stock dividends from the qualified‑dividend definition (see IRC §1(h)(11)(B)).

2. Timing of tax liability

Pay‑date: 15 Oct 2025.
Record‑date: The date at which you must be a shareholder of record (the news cut‑off is not shown, but it will be a few days before the pay‑date).
Taxable event: The dividend becomes taxable when it is received (or accrued, if you elect to treat accrued but unpaid dividends as income under the “constructive receipt” doctrine).
Cumulative feature: If any prior periods missed a dividend, those arrears accrue and are paid later. Each accrued amount is taxable in the year it is actually received, not when it originally accrued.

3. Federal income‑tax rates for U.S. individuals

2025 Tax Bracket (filing status)	Federal marginal rate on the preferred‑stock dividend
10 % – 12 %	10 % – 12 %
22 % – 24 %	22 % – 24 %
32 % – 35 %	32 % – 35 %
37 %	37 %

No preferential treatment: The dividend does not qualify for the 0 %/15 %/20 % qualified‑dividend rates.

4. Additional taxes that may apply

Tax	Who may be subject	How it works
Net Investment Income Tax (NIIT)	High‑income individuals (modified adjusted gross income > 200 % of the filing threshold)	3.8 % on the lesser of net investment income (including this dividend) or the amount of MAGI that exceeds the threshold.
State and local income tax	Most U.S. taxpayers	Taxed at the state’s ordinary income rate (varies by jurisdiction).
Alternative Minimum Tax (AMT)	Taxpayers subject to AMT	The dividend is included in the AMT calculation as ordinary income.
Corporate Alternative Minimum Tax (if applicable)	Certain corporations (large corporations)	Similar inclusion as ordinary income.

5. Reporting the dividend

Form 1099‑DIV (U.S. individuals & entities): CMS Energy will issue a 1099‑DIV by the end of January 2026 showing the total amount of preferred‑stock dividends paid in 2025.
Form 1099‑INT is not used (the dividend is not interest).
Box 1a (Ordinary dividends) will be filled; Box 11 (Qualified dividends) will be zero.
Foreign investors receive Form 1042‑S (or similar) showing the amount of U.S. withholding tax applied.

6. Tax consequences when the security is redeemed or sold

Event	Tax result
Partial or full redemption by the issuer (e.g., the “redeemable” feature is exercised)	Treated as a sale of the security. The difference between the redemption price and the investor’s adjusted basis is a capital gain or loss (short‑term if held ≤ 1 year, long‑term if > 1 year).
Sale on the open market	Same capital‑gain treatment as any equity security.
If the security is classified as “debt‑like” for tax purposes (rare, but possible if the preferred is deemed a hybrid)	The redemption may be treated as interest income rather than capital gain. The specific classification is determined by the issuer’s Form 10‑Q/10‑K footnotes and the IRS “Hybrid and Dual‑Nature” rules (IRC § 7701).

Practical tip: Most market participants treat CMS’s perpetual preferred as an equity security, so capital‑gain treatment on redemption is the default assumption unless the company’s filing explicitly states otherwise.

7. Special considerations for tax‑advantaged accounts

Account type	Effect on tax treatment
Traditional IRA/401(k)	Dividend is tax‑deferred; no current tax liability. It will be taxed as ordinary income when distributions are taken.
Roth IRA/Roth 401(k)	Dividend is tax‑free (qualified) provided the account has met the 5‑year holding rule. No tax due on receipt or later withdrawal.
Health Savings Account (HSA)	Tax‑free growth; dividend is not taxed while the account remains qualified.
Tax‑Exempt municipal‑bond funds	No special interaction—preferred‑stock dividends are still taxable at the federal level even if held inside a tax‑exempt fund (the fund’s status does not change the dividend’s character).

8. Practical “what‑if” scenarios

Scenario	Tax impact
You missed the record date and receive the dividend later (e.g., via a “lost‑share” claim)	The dividend is taxable in the year you actually receive it, not the original declaration year.
You are a foreign investor from a country with a 10 % treaty rate on U.S. dividends	You can submit Form W‑8BEN to claim the reduced 10 % withholding. The dividend is still ordinary income for your home‑country tax return, but you’ll only have 10 % U.S. withholding.
You hold the preferred stock in a partnership (K‑1)	The partnership will pass the dividend through to you on Schedule K‑1 as ordinary income. You’ll report it on your personal Form 1040, again as ordinary dividend (non‑qualified).
You have a large amount of accrued but unpaid dividends from prior periods	Each accrued amount is taxed when paid. If you receive a lump‑sum catch‑up payment, the entire sum is ordinary income in the year of receipt, potentially pushing you into a higher marginal bracket or triggering NIIT.

9. Bottom‑line checklist for investors

Confirm you are a shareholder of record by the specified record date to receive the Oct 15, 2025 dividend.
Expect ordinary‑income tax treatment on the dividend (non‑qualified).
Plan for federal, state, and possible NIIT liabilities—the dividend is taxed at your marginal ordinary rate.
If you are a foreign investor, provide Form W‑8BEN to claim any treaty reduction; otherwise, 30 % withholding applies.
Record the dividend on your 2025 tax return (Box 1a of Form 1099‑DIV). No qualified‑dividend amount will appear.
Track the basis of the preferred stock so you can correctly calculate capital gains/losses if/when the security is redeemed or sold.
Consider the impact of the cumulative feature—any missed dividends that accrue will be taxable when finally paid.
If held in a tax‑advantaged account, the dividend’s tax is deferred (or tax‑free in a Roth) until distribution.

TL;DR (for quick reference)

CMS Energy’s 4.200 % cumulative preferred‑stock dividend is taxed as ordinary (non‑qualified) dividend income for U.S. individuals—subject to your regular federal marginal tax rate, state tax, and possibly the 3.8 % NIIT.
Foreign investors face 30 % withholding unless a treaty reduces it (via Form W‑8BEN).
No qualified‑dividend rates apply; you’ll receive a 1099‑DIV with the amount in Box 1a and Box 11 = 0.
Accrued missed dividends are taxable when paid; the cumulative nature does not change the tax character.
Redemption or sale triggers capital‑gain/loss treatment (short‑ or long‑term depending on holding period).

By keeping these points in mind, you can accurately estimate the tax impact of holding CMS Energy’s cumulative redeemable perpetual preferred stock and ensure proper reporting on your 2025 tax return.