Every transaction in business involves numerous complex tax components. When examining the tax aspects related to a transaction, factors such as the nature of the entity, the structure of the activity, the type of activity, reporting obligations, and the taxation thresholds that may apply are just a few of the influencing factors.
Each of these factors requires careful consideration and professional judgment. However, in this article, we will focus on just one key aspect of taxation that significantly impacts the feasibility of your transactions: the taxation of capital gains and dividends in the United States.
As any investor knows—whether they are a novice or an experienced professional—expanding business activity to the United States or participating in real estate investments there requires careful attention to questions such as market demand, supply, costs, pricing, and potential profits. However, seasoned investors understand that there are other critical aspects to consider when making decisions about engaging in business activity in the U.S., and the tax implications of such activities are among the most important. In this article, we will focus specifically on the taxation of capital gains and dividends in the United States.
Capital Gains
What Are Capital Gains?
Capital gains refer to the increase in value realized upon the sale of a property, defined as the difference between the price received for the property and the original purchase price. “Property” in this context not only refers to real estate but also to financial assets. Thus, the difference between the selling price and purchase price when selling financial assets such as stocks, mutual funds, or bonds is considered a capital gain.
What Is the Tax That Will Apply to Capital Gains in the United States?
The tax on capital gains, as defined above, is governed by specific rules in U.S. tax law.
U.S. law distinguishes between assets sold within one year of purchase (short-term capital gains) and assets sold after being held for more than one year (long-term capital gains). To incentivize investors to hold onto assets for longer periods rather than selling them immediately after purchase, U.S. tax law applies lower tax rates to long-term capital gains.
Capital Gains Tax Rates:
- Short-term Capital Gains:
- For assets held for one year or less, the gain is taxed at the “ordinary” income tax rate. For individuals or partners in an LLC, this rate is based on the taxpayer’s total income and can range from 10% to 37%.
- For corporations (both domestic and foreign), short-term capital gains are taxed at the corporate tax rate of 21%.
- Long-term Capital Gains:
- For assets held for more than one year, the tax rate is typically lower, ranging from 0% to 20%, depending on the taxpayer’s income level.
- Special tax rates apply in certain cases:
- 28% applies to capital gains from the sale of collectibles or qualified small business stock.
- 25% applies to capital gains related to depreciation recapture.
Summary of Capital Gains Tax Rates:
| Asset Holding Period | Individuals (Including LLC Partners) | Companies (Local and Foreign) |
| Short-term (Held ≤ 1 year) | Marginal tax rate: 10%-37% | Corporate tax rate: 21% |
| Long-term (Held > 1 year) | 0%-20%, depending on income level | Corporate tax rate: 21% |
Dividend Taxation
What Is a Dividend?
A dividend is a payment made by a corporation to its shareholders from its profits. It represents additional income for the shareholder and is included in their annual income for tax purposes. The tax on dividends applies to the recipient, not the company that distributes the dividend.
What Is the Dividend Tax Rate in the United States?
Dividend taxation is similar to capital gains taxation, but instead of distinguishing by the holding period of the asset, it depends on the type of dividend: qualified dividends and ordinary dividends.
- Ordinary Dividends:
- Ordinary dividends are taxed at the taxpayer’s regular income tax rate, which ranges from 10% to 37% for individuals or partners in an LLC.
- For corporations (both domestic and foreign), the tax rate is the corporate tax rate of 21%.
- Qualified Dividends:
- Qualified dividends are taxed at preferential rates similar to those for long-term capital gains. These rates range from 0% to 20%, depending on the taxpayer’s income level.
- For both local and foreign corporations, qualified dividends are taxed at the corporate tax rate of 21%.
- However, there is an exception for dividends received from a foreign subsidiary: if the parent company holds at least 10% of the subsidiary for more than one year, it may qualify for a dividend tax exemption.
Summary of Dividend Tax Rates:
| Type of Dividend | Individuals (Including LLC Partners) | Companies (Local and Foreign) |
| Ordinary Dividends | Marginal tax rate: 10%-37% | Corporate tax rate: 21% |
| Qualified Dividends | 0%-20%, depending on income level | Corporate tax rate: 21% (except for certain foreign subsidiaries, where tax exemption may apply) |
Conclusion
When engaging in business activities in the United States, it is crucial to consider the tax implications, including the taxation of capital gains and dividends. Understanding these tax rates and rules will help you make more informed decisions about your investments and business operations in the U.S.
Do you have any questions? The MasAmerica team, your US tax experts in Israel, would be happy to advise you and assist in planning and managing the tax aspects of your business activities in the United States.
