Tax Relief: Changes In How Dividends Are Taxed

One of the ways in which the “Jobs and Growth Tax Relief Reconciliation Act of 2003” affects us is in the way in which dividends are taxed. People in the US, who have invested money and receive dividends from their investments, now qualify to pay lower taxes on those dividends, whether the dividends are received from domestic or qualified foreign corporations.

In the past, income earned from dividends was considered to be ordinary income, there was no tax relief; and, dividends were taxed at a normal rate that might have been as high as 35%. This no longer applies and the maximum tax rate applied to dividend income is now 15% for most people; and, for those in the tax 10-5% bracket, as little as 5%.


Unfortunately, it is not quite as simple as it may, at first, appear and for the US taxpayer to qualify for tax relief on dividends a holding period applies. This is where it all begins to get a little complicated. However, in a nutshell, the taxpayer has to hold the stock from which the dividends are paid for more than sixty days during a one hundred and twenty day period commencing sixty days prior to the ex-dividend date.

Does this still sound complicated? You bet! That is why we are here to make things simple for you. Don’t make the mistake of “trading” dividend paying shares in order to qualify for tax relief on dividends, as the holding period rules still apply and your dividend will, again, be considered as regular income. This will be taxed at a normal rate.

By: N.F.Centeno

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