Taxes on Dividends: 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. and semi-annually in most other countries. Everyone will need to  pay taxes on dividends.

In the U.S., though, dividends can have favorable tax treatment for many small investors, making them tax efficient in a regular brokerage accounts. This is good news. 

1. Why do Investors Love Dividends So Much?

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.

2. What is the Tax Rate on Dividends?

For families closer to the median U.S. family income of about $67,521 in 2020, the tax rate on regular income is 12%, but it is 0% on dividends. Those making over $80K will pay 15% on dividends.

What are Qualified Dividends?

Qualified dividends have an advantageous tax rate. But not all dividends are qualified.

What are the Qualifications?

– Paid by a U.S. company or a company in a U.S. possession – Paid by a foreign company residing in a country that is eligible for benefits under a U.S. tax treaty – Paid by a foreign company that can be easily traded on a major U.S. stock market

Nonqualified Dividends

All other dividends are nonqualified dividends or ordinary dividends. Dividends in this category can include stocks that do not meet the above criteria, like REITs, and MLPs.

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