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Tax Tip of the Week
For the week of
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.

Click here to view previous tax tips.


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The information contained in this site is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance.

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