Taxes on Dividends
Answering 4 Key Questions
Dividends are one of my favorite things to collect.
Buy a stock that pays a dividend, and a company pays you passive income every quarter.
In the U.S. and most other countries, for that matter, dividends are considered income, and hence they are taxed.
However, in most cases, everyone must pay taxes on dividends.
In the U.S., though, dividends can have favorable tax treatment for many small investors,
making them tax efficient in regular brokerage accounts.
1. Why do Investors Love Dividends So Much?
One of the most important reasons is that dividends are a return of cash to an investor.
However, when a company pays a dividend, the investor decides what to do with that money.
You can buy additional shares of the same company. Alternatively, you can purchase shares of a different company.
Dividend tax rates differ depending on whether the dividend is qualified or nonqualified, also known as ordinary.
2. What is the Tax Rate on Dividends?
Families in the highest income tax bracket pay a 37% tax rate on regular income and only a 20% tax rate on dividends.
The difference in the tax rate can be dramatic depending on your income.
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