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.
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.
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.
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. Nonqualified dividends are taxed at the higher regular federal income tax rate.
You must pay taxes on dividends, but how do you tell if your dividends are qualified or nonqualified? Making this determination is not a difficult task, and there is nothing to worry about. You don’t need to keep track of the ex-dividend dates.