Nobody says you need to know how to count to be a member of Congress, and the lawmakers proved it when they wrote a rule to prevent tax schemers from playing fast and lose with the new dividend tax break. When Congress slashed the tax on "qualified dividends" last year, it set a minimum holding period for payouts to qualify.
The law says you must hold the stock paying the dividend for at least 61 days out of a 120-day period that begins 60 days before the "ex dividend date," which is the day you must own the stock to get the dividend. The idea is to prevent investors from buying just in time to get a dividend taxed at 15% and then selling right away to claim a loss that could save as much as 35%. (A stock's price falls by the amount of the payout.)
Sounds good, but there's a little problem. For tax purposes, the holding period begins the day after you buy. So, if you bought the day before the ex dividend date, your holding period starts on the ex dividend date. And, because the prescribed 120-day period ends 60 days later, there's no way to hold the stock for 61 days during that period.
Thinking that Congress meant what it said, when the IRS wrote the instructions for the 2003 tax returns, the agency included an example that specifically says payouts from stocks purchased the day before the ex dividend date can't be qualified dividends.
Of course, Congress didn't really mean 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. The tax agency believes them, too. So despite what the law and the instructions say, dividends can qualify for the tax break if you owned the stock for at least 61 days out of (actuallly) a 121-day period that starts 60 days before the ex dividend date.
Don't let a literal interpretation lead you to overpay your tax on dividends by treating qualified payouts as non-qualified.
GETTING STARTED
