IE 11 is not supported. For an optimal experience visit our site on another browser.

Don’t give the taxman a dividend bonanza!

The IRS rules on company payouts have changed. "Today" show financial editor Jean Chatzky has the details, plus another tax tip.

Q: I remember hearing a year or two ago about the government planning to eliminate taxes on dividends. Did the law go through, and how will it affect me at tax time?

A: Dividends are the profits some companies pay out to their stockholders throughout the year. The IRS used to regard tax dividends as normal income. If your income caused you to be taxed at 25 percent, then any dividend payments you received would also be taxed at 25 percent. A law went into effect in the spring of 2003 that didn't eliminate dividend taxes, but rather reduced them to 15 percent (or 5 percent for taxpayers in lower income levels). And the law retroactively applies to all dividends received in 2003.

How much the new tax law will affect you depends on whether you own stocks or mutual funds that pay dividends, and how much income you derive from those dividend payments.

People who depend on an income stream from investments that pay high dividends, such as utility company stocks, will fare the best since the IRS won't tax that portion of their income as much as it had in the past.

Be aware that the new rules don't apply to income from money market funds, bond funds, or certain types of stock dividends that the IRS classifies as interest (like dividends from Real Estate Investment Trust stocks). Also, the law doesn't affect any dividends from investments already in tax-deferred vehicles like 401(k) plans or IRAs.

Jean Chatzky’s Bottom LineThis week: Stay-at-home IRAsJust because you don't earn a paycheck, doesn't mean you can't contribute to an IRA.

If you're a stay-at-home parent or spouse, you can — and should — put $3,000 into an IRA every year (the maximum annual contribution allowed under IRS guidelines). The deductibility guidelines work the same as those for traditional and Roth IRAs.

Want evidence this is a smart move? Say a 30-year-old woman has a baby and plans to return to the workforce in seven years (when her child is in school). If she puts $3,000 a year (for those seven years) into a spousal Roth IRA that earns an annual tax-free return of 9 percent, by the time she retires at 65, she will have more than $335,000 in that account.

No matter what happens to the cost of living, that's a significant chunk of change.

Jean Chatzky is the financial editor for “Today,” editor-at-large at Money magazine and the author of “Talking Money: Everything You Need to Know About Your Finances and Your Future.” Copyright © 2004. For more information, go to her Web site, .