Taxes on Dividends

• Posted on April 24, 2008
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Through 2012, dividends received by an individual shareholder from domestic corporations (and certain foreign corporations) are treated as net capital gain for purposes of applying the capital gain tax rates. This means dividends are taxed at 15% for taxpayers whose marginal rate is 25% or higher, and 0% for those in the 10% and 15% Tax Brackets.  These rates are in effect through 2012.  Capital losses cannot offset the dividend income for purpose of the tax computation. To qualify for the lower rate, the stock on which the dividends are paid must be held for at least 60 days during the 120-day period that begins 60 days before the “ex-dividend” date. Dividends on stock held in a retirement plan or traditional IRA will not benefit from the new lower rates; distributions from these plans continue to be taxed at ordinary income rates.

Investors with investments both in and out of tax qualified accounts should consider putting more of the interest-generating portion of their portfolios, which would be subject to tax at ordinary income rates in any event, into their 401(k)s and IRAs, and more heavily weight the investments intended to generate preferential capital gain and dividend income in their taxable accounts.