Dividend Tax Considerations

17 Aug 2013 13:26

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One of the best tax moves in the U.S. has been the reduction in qualified dividend payments to a standard rate of 15% (20% for those in the highest in tax bracket).

Initiated during the Bush Presidency in 2003 and extend throughout President Obama’s terms, the change in the dividend tax rate policy has motivated more companies to issue dividends during that time period rewarding shareholders. Of course there are the counter arguments that the dividend tax rate only benefits the rich but as interest rates on savings have remained near zero and the constant reminder people are struggling to fund retirements this argument has been slowly dying off.

Over the years more dividend paying companies have led to the increase in popularity of dividend growth investing. And retirees are learning to embrace a new income stream at a lower tax bracket which has helped provide another solution to funding retirement. A lower tax rate may have been one of the motivators why you became a growth investor but if you are new to this investment style you should be aware that there may be other countries that can tax your dividend.

Just because a stock is listed on a U.S. stock exchange does not mean that all dividends are only taxed by the U.S. There are quite a few foreign stocks also traded and the originating countries may have a tax rate that can hurt you dividend growth. Some countries such as the U.K. have a 0% rate while others such as Switzerland have a rate as high as 35%. Understanding a foreign countries tax rate is essential when evaluating both a dividend payment as well as growth potential, to assist here is a link to a table of dividend tax rates by country.

Additionally, if you are not careful when filing your income tax you could be double taxed (once by the foreign country and once by the U.S.). When filing your annual income tax return there is a credit allowed for foreign taxes to avoid the double taxation (IRS tax credit link http://www.irs.gov/taxtopics/tc856.html).

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