How Are Dividends Taxed?

Introduction

Dividends are a portion of the company's profits that are distributed to shareholders. They are a popular way for companies to return value to investors. However, these payouts are subject to taxes. In this article, we will discuss how dividends are taxed.

What are dividends?

Dividends are payments made by a company to its shareholders out of its profits. They can be in the form of cash, stock, or other property. They are usually paid quarterly but can be paid annually or semi-annually.

How are dividends taxed?

Dividends are taxed as ordinary income, which means they are subject to the sametax ratesas your salary or wages. The tax rate you pay on dividends depends on your income level and how long you have held the stock.

Qualified vs. non-qualified dividends

Dividends can be classified as either qualified or non-qualified. Qualified dividends are taxed at a lower rate than non-qualified dividends. To be considered qualified, the dividend must meet certain criteria, such as being paid by a U.S. corporation or a qualified foreign corporation.

Tax rates for qualified dividends

The tax rates for qualified dividends are the same as the long-term capital gains rates. For 2021, the tax rates for qualified dividends are as follows:

For individuals with taxable income of up to $40,400 ($80,800 for married couples filing jointly), the tax rate is 0%.

For individuals with taxable income between $40,401 and $445,850 ($80,801 and $501,600 for married couples filing jointly), the tax rate is 15%.

For individuals with taxable income over $445,850 ($501,600 for married couples filing jointly), the tax rate is 20%.

Tax rates for non-qualified dividends

Non-qualified dividends are taxed at the same rates as your ordinary income. For 2021, the tax rates for non-qualified dividends are as follows:

For individuals with taxable income of up to $9,950 ($19,900 for married couples filing jointly), the tax rate is 10%.

For individuals with taxable income between $9,951 and $40,525 ($19,901 and $81,050 for married couples filing jointly), the tax rate is 12%.

For individuals with taxable income between $40,526 and $86,375 ($81,051 and $172,750 for married couples filing jointly), the tax rate is 22%.

For individuals with taxable income between $86,376 and $164,925 ($172,751 and $329,850 for married couples filing jointly), the tax rate is 24%.

For individuals with taxable income between $164,926 and $209,425 ($329,851 and $418,850 for married couples filing jointly), the tax rate is 32%.

For individuals with taxable income between $209,426 and $523,600 ($418,851 and $628,300 for married couples filing jointly), the tax rate is 35%.

For individuals with taxable income over $523,600 ($628,300 for married couples filing jointly), the tax rate is 37%.

Conclusion

In summary, dividends are a popular way for companies to return value to shareholders. However, they are subject to taxes. The tax rate you pay on dividends depends on your income level and how long you have held the stock. Qualified dividends are taxed at a lower rate than non-qualified dividends. It's important to understand how dividends are taxed so you can make informedinvestment decisions.