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What Are Dividend Tax Rates?

What Are Dividend Tax Rates?

Dividend tax rates refer to the rate of taxation you may be assessed should stocks in your portfolio pay you dividends during a tax reporting period. A dividend represents an increase in the per share price of the stock that results in profits for the corporation who issues it. 

Not all stocks pay dividends. Corporations who do issue stockholders dividends do so as a benefit to selecting to invest in their stock over the stock of a competitor, and it is a sharing of profits between stockholders and corporations. 

New regulations were introduced that may or may not affect the tax assessed on dividends you may earn. Dividends are typically taxed as ordinary taxable income, so the impact to your portfolio may or may not be felt. 

Learn more from experts about dividend tax rates and decide if including dividend-paying stocks in your investment portfolio is the right decision for you.

Dividends vs. No Dividends

Some stocks do not pay dividends, and in some corporations preferred stockholders receive dividends but common stockholders do not. In still other corporations preferred stockholders receive regular fixed dividend payments but common stockholders receive infrequent dividends that are not announced ahead of schedule. 

The way that a stock you are interested in is handled should be investigated prior to investment, as this can affect the tax burden you may bear should your stock return dividends during the year. 

It is useful to review a stock's past history against current taxable income brackets and how the rest of your investment portfolio is performing to get a better sense of whether the return will outweigh the cost in taxes to you from purchasing dividend-bearing stocks.

How Dividends Are Taxed

To date, dividends have been taxed as marginal interest, which refers to the interest rate that applies to each additional dollar of earned income in a tax reporting period. As your income rises, your tax rate will rise correspondingly. 

While in many cases dividends are reported by the issuing corporation as dividends, in some cases they are reported as capital gains distribution dividends, and in this case you may be subject to a different tax rate. Still other types of dividends are really interest payments, such as those paid to you through interest earned on a credit union account. 

Here, the services of a tax professional can be very helpful in sorting out how to report different types of dividend income earned. Some investors decided to reinvest their earned dividends in an attempt to avoid taxation, and this can backfire, because reinvesting dividends is the equivalent of purchasing new shares of stock, and will be regarded by the Internal Revenue Service (IRS) as such. 

The best strategy here is to report the dividends as ordinary income, reinvest the dividends into new shares of stock, and then hold those shares for more than a year to take advantage of taxation at the lower rate for long-term capital gains. 

Many electronic tax filing programs can assist with recording and reporting different types of dividend payments, or you can hire a tax professional to assist you.

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