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Qualified dividends still have tax advantages.

If you invest in a corporate bond, you'll receive interest. Such interest is taxed as ordinary income at rates up to 35% in 2012. If you invest in that same company's stock, you may receive dividends as a shareholder's portion of company profits. Such dividends probably will be taxed no higher than 15%, in 2012, whereas low-income investors owe 0% tax on qualified dividends.

What are "qualified" dividends? These are generally dividends that have been paid by a U.S. corporation or a qualified foreign corporation that are not specifically excepted from qualified dividend treatment on stock that a taxpayer has held for a certain period.

In order to treat dividends paid on a stock as qualified dividends, you must hold on to the stock for at least 61 days during the 121-day period that began 60 days before the ex-dividend date. The ex-dividend date is the first date on which the stock buyer will not receive the dividend paid on behalf of the shares being sold.

Example: In March 2012, XYZ Corp. announces a dividend to all stockholders, as of April 19, 2012. The ex-dividend date is April 17. Any purchaser who buys before April 17 will receive that dividend.

Say you buy that stock on April 16 to get the dividend. That opens up a window of time extending from February 17 (60 days before the ex-dividend date) to June 17, 121 days later. You must hold the stock for at least 61 days during this period for the dividend to be qualified and for you to owe tax at the 0% or 15% rate. If you sell the stock too soon, you'll owe tax on that dividend at your ordinary income tax rate.

The 61- and 121-day requirements refer to common stock, which most investors hold. For preferred stock, the same rules apply, but the numbers are 91 and 181 days to owe tax at the low rates.

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Publication:CPA Client Bulletin
Date:Mar 1, 2012
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