Taxes on Dividends: Answers to 4 Key Questions

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?

There are several reasons investors like dividends. 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?

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.

Qualified Dividends

The concept of qualified dividends was implemented in the U.S. when the 2003 tax cuts were signed into law. Before this law went into effect, dividends were taxed at the regular income tax rate. Qualified dividends have an advantageous tax rate.

Nonqualified Dividends

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

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