Taxes on Dividends: Answers to 4 Key Questions

Dividends are one of my favorite things to collect. Even John D. Rockefeller understood the power of dividends. He has been quoted as saying, “Do you know the only thing that gives me pleasure? It's to see my dividends coming in.” 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.

Why do Investors Love Dividends So Much?

Why do dividends matter to investors?  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.


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.


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. Reinvesting dividends in the same stock or mutual fund or ETF, for that matter, does not avoid taxes. You must still pay taxes on the dividends.


What About Tax-Advantaged Accounts?

More people own a retirement account than a taxable brokerage account. 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.


Taxes on dividends can quickly be a complicated subject. The reason being is that there are variations of regular cash dividends. Some companies issue stock dividends whose treatment can be complicated.


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