What are dividends and how are they taxed?
A dividend is a distribution of cash or property paid by a corporation to a shareholder out of the corporation’s current or accumulated earnings and profits. Dividends are included in the shareholder’s gross income as ordinary income. A shareholder only has tax liability related to a dividend if there is a distribution of property by a corporation to its shareholders out of its earnings and profits. A mere declaration by the corporation that it has authorized a distribution is not sufficient to trigger a shareholder’s tax liability. Dividends are included in gross income of a shareholder when they are actually or constructively received. Dividends are generally taxed as ordinary income. However, qualified dividends are taxed at lower rates. For tax years after 2007, the maximum tax rate on qualified dividends and net capital gain is 0% (reduced from 5%). There is still a 15% maximum tax rate on qualified dividends and net capital gain.
