Dividend Taxes: Answers to 4 Key Questions
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Buy a stock that pays a dividend, and a company pays you passive income every quarter in the U.S.
Dividends are one of my favorite things to collect. Even John D. Rockefeller understood the power of dividends.
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However, in most cases, everyone must pay taxes on dividends.
In the U.S. and most other countries, for that matter, dividends are considered income, and hence they are taxed.
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In the U.S., though, dividends can have favorable tax treatment for many small investors.
It is also possible for dividend-paying stocks to be held in tax-advantaged account.
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1. Why do Investors Love Dividends So Much?
There are several reasons investors like dividends. One of the most important is that dividends are a return of cash to an investor.
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A company can return some money to stock owners by buying back shares or paying a dividend.
However, when a company pays a dividend, the investor decides what to do with that money.
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2. What is
the Tax
Rate on Dividends?
Dividend tax rates differ depending on whether the dividend is qualified or nonqualified, also known as ordinary.
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The difference in the tax rate can be dramatic depending on your income.
Families in the highest income tax bracket pay a 37% tax rate on regular income and only a 20% tax rate on dividends.
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