Dividend Taxation Treatment in USA

Investing in dividend paying companies is a huge opportunity in this moment. The current P/E ratio is historically low (12.9 vs an historical average of 15) and dividend taxation treatment works in the favor of investors right now, through low tax rates, available until 2013. There are some categories of dividend income with 0 % tax rates.

Which Dividend Tax Treatment to apply?

Finding out everything about dividend taxation treatment helps you to make the right decision on how to invest your money. The low tax rates for dividend income were introduced in 2003, under Bush administration, and were supposed to last until 2010, but the legislation was extended for two more years. If you are interested to invest in dividend paying companies, you should do it as soon as possible, in order to benefit from low tax rates.

In this moment, the lowest tax rate for dividend income is 0%, and the highest 35%. Since 2013, the situation will change: the lowest tax rate for dividend income will be 15%, while de highest will be 39,6%.

Qualified dividends taxation treatment

Dividend taxation treatment is different for qualified and ordinary dividends. With qualified dividends, you get lower tax rates. When you decide your investment strategy, you need to consider this important aspect, which has a huge impact on your profits.

Under US legislation, qualified dividends are the ones that meet some specific criteria and are taxed as capital gains. In order to qualify for this preferential dividend taxation treatment, you need to have held the stock for at least 61 days, during the 121 days period that starts 60 days before the ex-dividend date.

Ex-dividend date is two days before the record date, when companies count all the shareholders. Other conditions for qualified dividends: to be paid until December 31, 2012, to be paid by a US corporation, one located in a country eligible for benefits due to a US tax treaty or a foreign corporation traded on a US stock market. If your ordinary income tax rate is 10 % or 15 %, you benefit form 0% tax rates for qualified dividends income in 2011 and 2012. Since 2013, the tax rates for qualified dividends income will increase to 15 %, respectively 28%. If you fall under higher ordinary income tax rates, for the qualified dividend income your tax rates will be 15 % in 2011 and 2012 and 31 %, 36 % and 39,6 % starting with 2013.

Taxation USA

Ordinary dividends taxation treatment

Some of the dividends are not treated as capital gain and are taxed at higher rates. If a mutual fund pays you dividends that come from taxable interest, from shares which were hold less then 61 days or from short term capital gains, those dividends are treated as ordinary income. In 2011 and 2012, you will be taxed, for your ordinary dividends, at the same rates as for the rest of your income: 10, 15, 25, 28, 33 and 35 percent. Starting with 2013, the tax rates for ordinary dividends income will increase to 15, 28, 31, 36, respectively 39,6 percent, considering the tax bracket where you fall.

How to pay taxes on your dividend income

Companies that pay you more then $10 in dividends have to send you a DIV-1099 form, which you have to fill in the appropriate fields, for qualified or ordinary dividends. If you are unsure about the correct way to fill your dividend tax forms, you should contact a reliable accountant.

When you decide the course of your investments, you have to consider the tax rates. For example, if you decide to sell some stocks at a certain moment, you have to check first whether the transaction affects your taxes. If you sell your stocks from dividend paying companies sooner then the minimum 61 days holding period necessary to benefit from lower tax rates, you might end up losing money, instead of making money.

Professional help to understand US dividend tax treatment

Understanding exactly how the taxation mechanism works on leads you to the right investment strategy. However, you might need advice from your accountant and your stockbroker agent, before making important business decisions. The difference between the way that qualified dividends and ordinary dividends are taxed is significant. For example, if you cash $1000 in dividends, for qualified dividends the taxes are among 0 and 150 dollars. For ordinary dividends, you will pay between $100 and $350 in taxes.

Useful Dividend Taxation Form:

Form 1116: Foreign Tax Credit

Form 1099-DIV: Dividend & Distribution Income

Form 1099-INT: Interest Income