Taxes on Dividends: Answers to 4 Key Questions
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.
1. Why do Investors Love Dividends So Much?
One of the most important is that dividends are a return of cash to an investor.
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.
The concept of qualified dividends was implemented in the U.S. when the 2003 tax cuts were signed into law.
All other dividends are nonqualified dividends or ordinary dividends.
Nonqualified dividends are taxed at the higher regular federal income tax rate.
3. Can You Avoid Taxes on Dividends?
In general, the answer is no, but there are exceptions. Dividends are a type of income, so they are taxable.
4. What About Tax-Advantaged Accounts?
Owning a retirement account is an advantage and a legitimate way to defer or avoid taxes on dividends. It is also a good way to leverage the power of compounding by reinvesting the dividends tax-free.
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