February 9, 2004 - Not all dividends are equal
Last year's tax legislation sharply cut the tax rate you'll pay on most
dividends. But not all dividends qualify for the new low rate. Whether you're
restructuring your investment portfolio or just gathering information for your 2003
tax return, it pays to know your dividend types.
Qualified dividends include most common stock dividends paid by U.S.
companies. You'll pay a maximum tax rate of 15% on qualified dividends, or just 5% if
you're in the lowest two tax brackets. Dividends paid by foreign companies may
also qualify if the company is traded on a US stock exchange or meets certain
other requirements.
Other dividends are taxed at higher ordinary income rates. This category
includes dividends paid by credit unions, mutual insurance companies,
cooperatives, and certain other nonprofit organizations. Some preferred stock dividends
may not qualify for the lower tax rates. Even regular dividends may not qualify
if you hold the stock for only a short time around the dividend payment date.
What about mutual fund dividends? Some dividends paid by mutual funds qualify
for the low rates; some don't. It all depends on the underlying investments
that generate income for the mutual fund. "Dividends" paid by a money market
mutual fund, for example, probably won't qualify. That's because the underlying
investments are usually not equity securities.
Although the rules are clear in most cases, there are numerous exceptions and
fine details. If in doubt, contact our office for advice before you invest.
It could save you from getting a nasty surprise when you receive your Form
1099-DIV at the end of the year.
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