The taxation of investor income changed significantly with the introduction of two kinds of taxable dividends – eligible and ineligible.
In approximate explanation, eligible dividends are those received from public company share holdings, while ineligible dividends are those received from private company shareholdings. If a private company is extremely profitable, and earns active income beyond the “small business rate” (currently $500,000), then this income, too, would qualify as an eligible dividend. Passive income earned by a private company and paid out to shareholders qualifies as as ineligible dividend.
These graphs show the marginal tax rates applicable to an incremental dollar source of different types of investment income:
*These tax rates are reflected as a percentage of the cash amount of the dividend, as opposed to the grossed up amount