What are the tax ramification of selling stocks and receiving dividends?

Question

I currently have begun purchasing stocks for the first time in years and am not completely up with the tax laws (realizing this whole mess will be changing in 2010). In the event, I sell stock I've held less than a year, it appears that they will be treated as a short term gain (in the event they are profitable). Everything that I read seems to indicate they can be taxed as high as 35%. But does it just flow through to ordinary income and you're taxed at the lower of 35% or your current tax rate? Our marginal tax rate last year was 15% and our effective tax rate was 11.9% (we max out on our 401k and have investment property that we have interest writeoffs and depreciation on, which is why we have such a low rate...not to mention we don't make that much...AGI of 103K). Also, what happens if the stock is sold at a loss. Finally, do dividends just flow through to ordinary income or is there a specific amount they are taxed at.

I have an accountant but he won't be back until Tues.

Answer 1

Steven has the best answer, but there are exception to the dividend tax rule.  Certain dividends such as dividends on limited partnerships and REITs are taxed at the full tax rate. That is because the companies distribute all of their earnings to the stockholders.  If you are in the 15% bracket with adjusted gross income of a joint return below about $63,000 then the tax rate would be 5% on dividends other than of those types of mentioned companies.

Answer 2

Short term capital gains are taxed at the same rate as ordinary income.  Short term is one year or less.

Long term capital gains  tax rates are: 5%,15%,25%,28%  Which one will depend on your income.  You must hold the stock for more than one year for it to qualify as long term.

Normal Dividends are taxed at your normal income tax rate.  Qualified dividends are taxed at 5% or 15%.  They must be idendtified as qualified dividends on your 1099D.  And the stock must be held for a minimum of 61 days.

Answer 3

Qualified dividends are taxed at 15% if your tax rate is higher than 15% or 5% if your tax rate is 15%.

Short-term capital gains and dividends that are not "qualified" are taxed at your ordinary income tax rate.  What you read was based on 35% being the highest ordinary income tax rate, which was probably true at the time.  Anyway, its your tax rate, not 35%, unless 35% is your tax rate.  I suppose that it is also "lower of 35% or your current tax rate", in the sense that either the two are equal or the lower is your tax rate.

If a stock is sold at a loss, the loss can be used to offset gains on other stock.  If there are no sales with gains or the total losses exceed the total gains, then up to $3000 can be deducted from other income, and the rest rolls over to the next year.

Answer 4

it's income,,make money now

Answer 5

Wait until Tuesday and let the accountant earn his keep. In the meantime you have tax exempt dividends. Ordinary dividends  go on the tax form as ordinary income . Then if you buy and sell  stock or assets you have either long term or short term capital gains or losses which are reflected on Scnedule D of the 1040. Put all the items in the proper places to determine your taxable income and the effective rate is dependent upon your adjusted gross income.