Dividend Taxes: Answers to 4 Key Questions

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.

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.

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.

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.

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.

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.

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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