Under the new tax law, qualified dividends are taxed at a lower
(in some cases considerably lower) tax rate than ordinary
income.
Under the new tax law, qualified dividends are taxed at a lower (in some cases considerably lower) tax rate than ordinary income.
Because of the new maximum 15-percent rate on dividends, investors should be alert to the opportunities in owning dividend-paying stock. In fact, if you’re in the two lowest income brackets, the tax on dividends drops to 5 percent.
In order for dividends to be taxed at the new lower rates, they must be considered qualified dividends, and they must also pass a holding period test.
Generally, in order to overcome the holding period hurdle, you must hold the underlying stock for at least 61 days during the 121-day period surrounding the ex-dividend date. So don’t think that you can simply trade in and out of stocks to receive qualified dividends, since the holding period test will certainly trip you up.
Not all dividends are created equal. Dividends paid by foreign stocks won’t qualify unless certain standards are met.
Most preferred dividends won’t qualify, since they are really debt payments as opposed to dividend payments. Likewise, dividends passed through to you from a mutual fund will only be qualified if additional holding period rules are met by both the fund and the investor. Additionally, dividends paid by an S corporation are normally not considered qualified.
While it might be a bit more difficult to mine qualified dividends from all of the dividend-paying stocks and mutual funds, it’s well worth the effort to enjoy reduced taxes on those dividends.
If you use the services of a professional investment adviser, make sure to ask for guidance on stocks paying qualified dividends.
If you’re managing your own investments, invest the time necessary to understand the new tax rules on dividends.
