Corporate
Dividends to Help 
Lower Your Tax Bill
The
stock market took investors on a wild ride over the past several years, but the
same can hardly be said for dividends.
In each quarter since 1998, the
S&P 500 dividend payment averaged about $4.00. In the first quarter of 2000 —
the peak of the late 20th century stock market boom — the S&P 500
dividend payment was $4.12.1, 2
Dividends have long been an effective way to help add income to a retirement portfolio, and provisions in
the 2003 federal tax law have sweetened their appeal. Whether you currently rely
on dividend income or are curious about the role it could play in your
portfolio, consider these factors.
Lower
Tax Rates
Income from qualified corporate dividends is now taxed at 15
percent for most people. Investors in the 10 percent and 15 percent marginal
income tax brackets are taxed at a 5 percent rate on dividend income. Dividends
must be in a taxable account to qualify for these rates. Any dividends paid to a
tax-deferred account such as an IRA will be taxed as ordinary income upon
withdrawal.³
But
Only for Now
Like so many recent federal tax rules, the lower rates on dividends are
temporary. For investors in the 25 percent marginal tax bracket and higher, the
lower tax rate applies to dividends received in 2003 through 2008. For investors
in the 10 percent and 15 percent tax brackets, the 5 percent tax rate is in
effect through 2007 and then falls to zero in 2008. Taxes on dividends will
revert to ordinary income tax rates on January 1, 2009, unless Congress acts to
extend the tax-law provision.
On
Qualified Dividends
The lower tax rates apply only to "qualified" dividend income. Income
from real estate investment trusts (REITs) or from the stock of companies
structured in a way to avoid certain types of taxes do not qualify.
Please call if you would like to
explore whether adding a dividend income strategy would be appropriate for your
situation.
1) Haver
Analytics, 2003
2) The return and principal value of stocks fluctuate with changes in market
conditions. Shares, when sold, may be worth more or less than their original
cost.
3) Distributions from tax-deferred retirement plans are taxed as ordinary income
and, if taken prior to reaching age 591/2, may be subject to an additional 10
percent federal income tax penalty. Consult your tax advisor about your specific
situation.
© 2004
Emerald Publication
