With stock market investments, it is possible to earn hundreds of dollars in dividend payments each quarter. With this money, you can provide for everyday expenses, purchase big-ticket items, or reinvest cash back into the market to purchase more assets. Taxes on dividends, however, will slow the wealth creation process. When estimating your tax bill, you must distinguish between qualified and ordinary dividends. To do so, you will first become familiar with the dividend payment schedule.
Qualified Versus Ordinary Dividends: Dividend Payment Schedule
Corporations generally pay dividends quarterly, so it is important for you to identify four separate sets of important dates, as a long-term investor. To receive dividends on the next quarterly payable date, you must buy and hold shares of stock prior to and through their ex-dividend date. The ex-dividend date generally falls one month before the payable date. For detailed dividend payment information, you will contact a corporation’s investor relations department.
Qualified Versus Ordinary Dividends: Timing
All dividends may be described as ordinary dividends. Due to the George Bush 2003 Jobs and Growth Tax Reconciliation Act, qualified dividends are a sub-set of ordinary dividends that qualify for special tax treatment. As of 2010, qualified dividends are either tax-free or taxed at maximum 15 percent tax rates, while ordinary dividends are taxed at higher ordinary income rates. As of 2010, ordinary income is taxed at 10, 15, 25, 28, 33, and 35 percent rates. For qualified dividends, you must own shares of stock for at least 61 days out of the 120-day period surrounding the ex-dividend date.
Qualified Versus Ordinary Dividends: Tax Paperwork
At tax season, your brokerage will prepare a 1099-DIV form and submit this document to both the IRS and your address on record. The 1099-DIV form separates your dividend payments into qualified and ordinary dividends — for the prior tax year. With this information, you will complete IRS Schedule D to report and pay taxes on your dividends to the IRS. IRS Schedule D is a complementary worksheet that provides supporting capital gains and dividends data for your 1040 Form.
Qualified Versus Ordinary Dividends: Warning
With investing, the ultimate goal is to make the most amount of money for the corresponding amount of risk you wish to take on. A balance of risk versus reward does not always translate into a minimal tax bill. In terms of taxes on dividends, you should not hold on to a losing stock, for the sole purpose of meeting qualified dividend requirements. Planning your investment strategy strictly around tax breaks may result in severe losses.
Qualified Versus Ordinary Dividends, Sources:
IRS: Dividends
Library of Congress: Jobs and Growth Reconciliation Tax Act of 2003
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