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NEW TAX LAW TIP: WEIRD RESULT WHEN STOCK BOUGHT JUST BEFORE EX-DIVIDEND DATE
October 24, 2003
Starting this year, "qualified dividends" are taxed at a 15% top federal rate. The tax law has a rule to prevent people from claiming dividends on stock held for very short periods: taxpayers must hold the shares for over 60 days of the 120 day period beginning 60 days before the ex-dividend date.
Barron's this week points out a weird result that occurs if you buy a stock the day before the ex-dividend date (subscription required for link). The holding period for a stock begins under the tax law on the day after the trade date. If you buy a stock on the day before it goes ex-dividend, the holding period starts on the ex-dividend date. Since the law says you have to hold the stock over 60 days to qualify for the 15% rate, you cannot qualify, because there are only 60 days left in the 120 day holding period.
The Moral: if you want to capture a dividend at the 15% rate, buy at least 2 days before the stock goes ex-dividend.
Remember: it's the tax law; it doesn't have to make sense!
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