How dividends are taxed has historically been up for debate. While many argue that it should be considered normal income and taxed as such, others believe that being taxed on dividend payments is technically double taxation and dividends should not be taxed. Presently, the taxation of dividends depends on whether the dividends are considered “qualified” or “ordinary” dividends.
What is a qualified dividend?
A qualified dividend is a dividend payment that was paid by a corporation to an investor between January 2003 and December 2012. Furthermore, the investor must meet certain holding period requirements. The investor must have held the stock for a minimum of 60 days for the previous 120 days that preceded the dividend payout date. Dividends received that do not meet either of these criteria are considered ordinary dividends.
Dividend Tax Rates
Due to the Jobs and Growth Tax Relief Reconciliation Act, which was enacted in 2003, qualified dividends are taxed a much lower rate than ordinary dividends. Ordinary dividends are taxed at the same rate as an individual’s ordinary tax income rate. For those individuals who are in the 25% tax rate or higher will be subject to a 15% tax rate. Those individuals in the 15% or 10% tax bracket are not taxed on dividend income.
Tax Rate Expiration
While the tax relief act is still in effect today, it is scheduled to expire on 12/31/2012. Once this tax relief act expires, the qualified dividend stipulation will expire and all dividends will be taxed at an individual’s ordinary tax rate.
