Feb 6th, 2008
How are Dividends Taxed?
Many people will say (I would as well) that the tax on dividends in the United States amounts to double taxation. After all, the corporation paying the dividend already paid taxes on their profits; now the shareholder as a part owner of the corporation also must pay tax on the dividends they receive. That discussion aside, dividends have, the last few years, received preferential tax treatment compared to what they had before (they were usually treated as ordinary income).
In 2003, congress passed (and president George W. Bush signed into law) the Jobs and Growth Tax Relief Reconciliation Act of 2003 which provides temporary relief (until January 1, 2011) for dividend recipients. For most individuals, qualified dividends (I’m not sure what makes dividends not qualified, although foreign dividends are one such category–I know because I get a little bit) are taxed at a maximum 15 percent rate by the federal government for most individuals; those who are very low income have their dividends are taxed at a maximum 5 percent rate through the end of 2007, after which they are not taxed on dividend income.
For someone like me, in the 25 percent tax bracket, that means dividend income is a much better deal than on my earned income. Dollars that come into my pocket through my investments in dividend paying company or funds are taxed at a lower rate than dollars that came into my pocket because of my 40 hour a week job or my part time job. This change made dividends much more appealing for those in higher tax brackets. I am concerned that these tax breaks will go away when they are due to expire, but I am hoping not.
