In addition to capital gains, taxpayer’s holding stocks can earn income in the form of dividends. While some dividend income is taxed at ordinary income tax levels, qualifying dividends will be taxed at a lower rate.
The Internal Revenue Code bifurcates dividend income into two categories: ordinary dividends and qualified dividends. To be eligible as a qualified dividend under Code Section 1(h)(11)(B), the dividends must be from a domestic corporation or a qualifying foreign corporation1. Additionally, the taxpayer must hold the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date2. All dividends failing to meet these requirements are treated as ordinary dividends.
Dividend tax rates for 2013 are as follows:
Ordinary dividends:
-Taxed at the taxpayer’s ordinary income tax rates for the current year (ranging from 10% to 39.6%)
Qualified dividends:
-Individual Taxpayers earning less than $36,250 and Married Taxpayers filing Jointly earning less than $72,500: 0% rate
-Individual Taxpayers earning between $36,250 and $400,000 and Married Taxpayers filing Jointly earning between $72,500 and $450,000: 15% rate
-Individual Taxpayers earning more than $400,000 and Married Taxpayers filing Jointly earning more than $450,000: 20% rate
1its stock trades on a US exchange (or is incorporated in a possession of the US or is eligible for benefits of a comprehensive income tax treaty with the US)
2the first date following the declaration of a dividend on which the buyer of a stock is not entitled to receive the next dividend payment.
Photo by: Scott Waldron