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.”

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.

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.

Qualified Dividends?

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.

Nonqualified Dividends

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.

Which One Is It?

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.