This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Making Sense of the Dividend-Tax Cut

Real Estate Investment Trusts (REITs)

By definition, REITs do not pay corporate tax on their profits, and they must pass on 90% of their net earnings to investors as dividends. Because of this structure, though, REIT investors will not be eligible for the 15% tax rate on REIT dividends. Instead, this income will continue to be taxed at the ordinary income tax rate.

But of course, there are a few exceptions. If the REIT pays a tax on all or part of its profits, its dividend (or a pro-rated portion of it) will be eligible for the 15% rate once it's distributed to investors. Also, if the REIT has taxable subsidiaries that contribute to the dividend payout, that portion will be eligible for the 15% rate as well. And if any part of the REIT dividend is attributable to capital gains the REIT incurred, that portion will be eligible for the 15% tax.

Foreign Stocks

Generally, if a foreign stock is traded as an ADR on a U.S. exchange, it will be eligible for the 15% dividend-tax rate. The reduced rate, though, will not apply to dividends paid by foreign investment companies, passive foreign investment companies or foreign holding companies. But some investors in non-ADR foreign stocks may still qualify for the 15% rate. Foreign companies based in U.S. territories (such as Puerto Rico or Guam) will be eligible, as will companies based in countries with favorable tax treaties with the U.S.

Investors in foreign stock mutual funds will receive an accounting from the fund company of which portion of their fund's dividend payments are subject to the 15% rate and which will still be subject to their ordinary income tax rate.

Also, if an investor pays foreign tax on the dividends received (unlikely if it's from an ADR) and subsequently receives a foreign tax credit for the amount of tax paid, the amount of credit allowed will be adjusted to reflect the new U.S. rates.

Retirement Plans

And don't forget that all stocks and funds, even dividend-paying ones, held in tax-advantaged accounts are ineligible for the reduced rate. Because you avoided tax on the money you contributed to such plans and then enjoyed the benefit of tax-deferred compounding, you don't get any additional tax breaks now. Instead, all your withdrawals from a 401(k) plan, a rollover IRA or a traditional deductible IRA will be taxed at your ordinary income tax rate.

2 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Submit an article to us!
SYM TRADE IT LAST %CHG
AAPL $128.73 -0.17%
FB $78.81 -0.23%
GOOG $540.66 0.51%
TSLA $230.65 2.00%
YHOO $42.02 -1.20%

Markets

DOW 18,070.40 +46.34 0.26%
S&P 500 2,114.46 +6.17 0.29%
NASDAQ 5,016.9290 +11.5380 0.23%

Partners Compare Online Brokers

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs