Estimated read time: 3 minutes
Publication date: 7th Apr 2021 12:09 GMT+1
Investing in dividend-paying companies is one of the simplest ways to earn an extra stream of income. Here, investors will benefit from a stable stream of recurring dividend income as well as long-term capital gains. However, similar to most other income, dividends are not free money and is taxed by regulatory authorities.
Here, are a few ways you can trim your tax bill by understanding how dividends are taxed.
Qualified dividends attract lower dividends
There are hundreds of dividend stocks that you can choose from. But investors should know not all dividends are taxed at the same rate.
Unlike ordinary dividends, a qualified dividend allows you to unlock the same rates as long-term capital gains. A dividend is considered as qualified if it is an ordinary dividend paid by a U.S. corporation or a qualified foreign entity whose shares are listed on a major exchange in the U.S.
With these dividends, investors will gain access to the 0%, 15% and 20% tax brackets instead of the usual federal income tax rates that could be as high as 37%.
A lower tax bracket is beneficial
Your total taxable income may qualify you for a lower tax rate on dividends. For example, in case you earn less than $40,400 each year as a single filer, or less than $80,800 as a married filer, you are eligible for the 0% tax-rate on qualified dividends.
In case you earn between $40,401 and $445,850 the dividends are taxed at a rate of 15%. For individuals earning annual income above $445,851 the dividends attract a 20% tax.
A tax-advantaged account like the IRA will lower dividend taxes
In case you own dividend-paying stocks in a taxable brokerage account, you will have to pay taxes on dividend payouts. However, you are allowed to defer or skip these taxes altogether by investing in an IRA or an Individual Retirement Account.
Traditional IRAs will not charge you taxes until you withdraw money from this account. Comparatively, Roth IRAs allow you to contribute money you have already paid taxes on and grow that money tax-free.
The final takeaway
Dividend stocks present an attractive opportunity for investors to earn additional income. In case you reinvest these dividends and buy additional shares, you will benefit from the power of compounding over time. You will also get the benefits of paying lower taxes on this income than you would from earning employment income.
So, in case you are planning to begin your investment journey by purchasing dividend stocks and grow your portfolio, these tax benefits can provide you with a great incentive.
Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.
Copyright © 2016-2021 Finscreener.org. All Rights Reserved.
Disclaimer: Before deciding to trade you should carefully consider your investment objectives, level of experience and your risk appetite. Forex and Tradegate data is a real-time with a 30 second refresh. Prices may not be accurate and may differ from the actual market price. Prices on the website are indicative and solely for informational purposes, not for trading purposes or advice. Please be aware of the risks associated with trading the on financial markets, it is one of the riskiest investment forms. Past performance does not guarantee future profits. We take no responsibility for any losses that may arise as a result of the data contained on this website. The content and the website are provided "as is", without any warranties. In no event will Finscreener.org, its employees, owners, directors, affiliates, partners, data provider, third party or anyone else liable to anyone else for any decision made regarding information on this website.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 67% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
This could take some time, please wait.