Under the 2003 tax law, dividends from U.S. and many foreign corporations are taxed no higher than 15 percent. Investors in the lowest federal tax brackets pay only 5 percent tax to the IRS, on dividend income.
To use the reduced rates on dividends, investors must hold the stock for more than 60 days during the 120-day period that begins 60 days before the ex-dividend date. Investors who trade in and out of a stock, to capture the dividend, will owe tax at rates up to 35 percent.
To see how this part of the law works, suppose you own shares in a company that declares a dividend in June. On June 15, the stock will go ex-dividend. That is, investors who buy shares on June 15 won’t get that dividend.
The 2003 tax law refers to a period of 120 days, from mid-April to mid-August, that bracket this ex-dividend date. You must hold this stock for more than 60 of those 120 days, in order to qualify for low tax rates on that dividend.
The way the rules work, and the way the math works, an investor who buys a stock the day before it goes ex-dividend would not get the low tax rate for that dividend, no matter how long the stock is held. This investor would receive the dividend but have to pay tax at his or her highest tax rate.