Your Personal Tax Savings Guide for Dividend Investing

Your Personal Tax Savings Guide for Dividend Investing

1

by David Peltier

Dividends can offer investors to generate consistent income with potential tax benefits. Rather than paying ordinary income tax rates, the maximum tax rate for qualified dividends (we'll explain later) is 20%, for individuals with income north of $413,000 ($464,000 for joint filing).

Folks in the 25% to 35% tax brackets pay a 15% tax on dividends, while those in the 10% and 15% brackets don't have to pay taxes on dividends.

Are You Qualified?

It's important to remember is that the 15% or 20% tax rate is only applicable to "qualified dividends". The IRS defines "qualified" as dividends that are paid by domestic companies and held for a minimum period of time.

A few foreign firms also offer qualified dividends; but since our main focus in the Dividend Stock Advisor is with U.S. stocks, we will focus on how long investors must hold shares in order to receive a more favorable tax rate.

In order for a dividend to "qualify" for the lower tax rates, a stock must be held for at least 61 days if the 121-day period around (two months before and two months after) the ex-date for the payout. Again, the ex-date is the two days before the record date, but you must actually own a stock at the close of trading the day before the ex-date in order to receive a dividend.

For example, you can buy a stock on the "must-own date", but must hold it for at least two more months in order to receive the lower tax rate for a qualified dividend. You can also buy the stock two months before the "must-own date", sell it on the ex-date and still receive the dividend at a lower tax rate, even though the dividend is paid after the stock has left your account.

Dividend Scalping

Dividends from stocks held less than 61 days in this four-month Nwuminbedr 1ow are subject to a higher ordinary income rate. This discourages investors from dividend "scalping"--holding a stock just long enough to qualify for the payout.

Stocks are adjusted lower at the open on the ex-date, so there's no benefit or a way to game a dividend through scalping. In one example, you buy before the ex-date; you then get the dividend, but your stock falls on the ex-date. On the other hand, if you buy on the ex-date, you get a lower

ABOUT THE AUTHOR

Meet David Peltier, Portfolio Manager Dividend Stock Advisor

David Peltier joined TheStreet, the leading financial information and investment resource firm, as a research associate in August 2001. In addition to Dividend Stock Advisor, he also writes and manages the very popular Stocks Under $10. David has managed products that covered deep-discount value investing and used dividend stocks as part of a retirement savings portfolio. Today, thousands of investors--from individual to institutional--rely on him for his expertise and insights into high potential, long-term investing strategies and stock picks.

David graduated from New York University's Stern School of Business with a degree in Finance. Prior to TheStreet, he was an analyst for Individual Investor magazine and its website. In addition to his regular video appearances for TheStreet, he has been a guest on NPR, Nightly Business Report, CNNfn, WNYW-TV and presented at The Money Show. David also hosts a live monthly chat on Twitter (@davidspeltier).

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Your Personal Tax Savings Guide for Dividend Investing

2

price, but you don't on the dividend.

Even though dividend taxes remain favorable for investors, readers should realize that dividend taxes can be a complicated topic. We have discussed some basic tips in this piece, but readers who have more specific questions should consult a tax professional.

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