Stock Dividends Taxable - At What Rate?

Under current tax law qualified dividends are taxed at the lower capital gain rates. For taxpayers in the lower two brackets (10% and 15%) those are taxed at a whopping 0%! For other individual taxpayers the rate is 15%. Unfortunately, that will end after 2010 unless Congress changes the rules. Unless changed, the current law will return those rates to ordinary income beginning January 1, 2011. That means the rate could be as high as 39.6% - more than double the current tax rate. Beginning in 2013 there will be an additional tax on the higher income taxpayers raising it 2.8% more.

What are qualified dividends? It is the dividends paid on stock you own for 60 days before and after the dividend date. More importantly, it generally applies to mutual funds, where most casual (and many savvy) investors invest their money.

Senate Finance Committee Chairman Max Baucus (D-Mont) has stated that Congress must address this dividend rate. Without action, the tax increase will hit most income levels in our country. Most in Congress seem to agree. The question is do they make a short-term change of two years, for example, to give Congress time to develop a comprehensive plan? Or make it permanent? And how to manage the offsets?

I think it is fairly safe to expect a change, at least affecting taxpayers with total income of $200,000 or below. But for now we do not know what it will look like.

And of course, Congress has failed to act before when everyone agreed that action was needed. Look at our current Estate Tax situation....