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

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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. 

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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.

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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.

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What are Qualified Dividends?

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

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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

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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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