A dividend is a distribution of a company’s earnings to its shareholders. Dividends are usually paid quarterly, but some companies pay them monthly or annually. They can be issued as cash payments, stock, or other property. While most people think of dividends in relation to stocks, they can also be paid by mutual funds, exchange-traded funds (ETFs), and real estate investment trusts (REITs).
As an investor, you may be wondering how dividends are taxed. Fortunately, the taxation on dividends is relatively straightforward. In this blog post, we’ll give you a brief overview of dividend taxes so that you can better understand how they work.
How Are Dividends Taxed?
Dividends are taxed at the same rate as long-term capital gains, which is currently 20% for federal taxes. However, there is an important distinction to be made here: long-term capital gains apply to assets that have been held for more than one year, while dividends are considered income and are thus subject to ordinary income tax rates, which range from 10% to 37%.
So, if you hold a stock for less than a year and then sell it for a profit, you will pay a higher tax rate on that profit than if you had held the stock for more than a year and then sold it. However, if you receive dividend payments from that same stock, you will be taxed at the higher ordinary income tax rate regardless of how long you have held the stock.
It’s worth noting that there is one type of dividend that is not subject to this rule: qualified dividends. Qualified dividends are those that are paid by U.S.-based companies or certain foreign companies and meet other requirements set forth by the IRS. If your dividends meet these requirements, they will be taxed at the lower long-term capital gains rate rather than at your marginal tax rate.
Summary
Dividends are a distribution of a company’s earnings to its shareholders. Most often they are paid quarterly but can also be paid monthly or annually. They can take the form of cash payments, stocks, or other assets. Dividends are subject to taxation; however, the taxation rates depend on whether the dividends are qualified or not. Qualified dividends receive preferential treatment and are taxed at the lower long-term capital gains rate rather than at the shareholder’s marginal tax rate. understanding how dividends are taxed can help you make informed decisions about your investments.
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