There's A Snafu In The New Dividend Rules!
Members of our Congress apparently do not know how to count, and they proved this fact back in 2003 when they wrote a new rule to prevent tax schemers from playing fast and loose with the new dividend tax break. It turns out that when Congress slashed the tax on "qualified dividends" that year, it set a minimum holding period for payouts to qualify.
The law states that you must hold the dividend paying stock for at least 61 days out of the 120-day period that begins 60 days before the ex-dividend date (which is the day you must own the stock in order to receive a dividend). The idea is to prevent investors from buying a stock just in time to get a dividend taxed at 15% and then selling it right away in order to claim a capital loss that could result in a savings as high as 35%. (When a dividend is paid, a stock's price falls by the amount of the payout.)
This all sounds good, but there's a little problem. For tax purposes, the holding period begins the day after you buy. So, if you buy the day before the ex-dividend date, your holding period actually starts on the ex-dividend date. And, since the prescribed 120-day period ends 60 days later, there's no way to hold the stock for 61 days in order to qualify for the tax break!
Of course, the Congress didn't intend to ban purchases on the day before a stock's ex-dividend date. And lawmakers have promised the IRS that they will fix the law. However, despite what the law and the IRS instruc-
tions say, dividends can qualify for the tax break if you owned the stock for at least 61 days out of the 121-day period that starts 60 days before the ex-dividend date.
If a literal interpretation led you to overpay your tax on dividends - by treating qualified payouts as nonqualified - file an amended return using Form 1040X in order to reclaim your money.
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The law states that you must hold the dividend paying stock for at least 61 days out of the 120-day period that begins 60 days before the ex-dividend date (which is the day you must own the stock in order to receive a dividend). The idea is to prevent investors from buying a stock just in time to get a dividend taxed at 15% and then selling it right away in order to claim a capital loss that could result in a savings as high as 35%. (When a dividend is paid, a stock's price falls by the amount of the payout.)
This all sounds good, but there's a little problem. For tax purposes, the holding period begins the day after you buy. So, if you buy the day before the ex-dividend date, your holding period actually starts on the ex-dividend date. And, since the prescribed 120-day period ends 60 days later, there's no way to hold the stock for 61 days in order to qualify for the tax break!
Of course, the Congress didn't intend to ban purchases on the day before a stock's ex-dividend date. And lawmakers have promised the IRS that they will fix the law. However, despite what the law and the IRS instruc-
tions say, dividends can qualify for the tax break if you owned the stock for at least 61 days out of the 121-day period that starts 60 days before the ex-dividend date.
If a literal interpretation led you to overpay your tax on dividends - by treating qualified payouts as nonqualified - file an amended return using Form 1040X in order to reclaim your money.
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posted by Bob Moser at
3:57 PM
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