Today, I’m going to explain how dividends are taxed in the United States. As a dividend
investor myself, understanding the tax implications of this strategy is very important. Keep in
mind, I’m not a tax advisor so this video is only based on my personal research and
experience. If you stick around to the end, I’ll share a way you may be able to avoid
dividend taxes altogether. My name is Zach and you should leave a like
and subscribe to the channel if you enjoy the video.
First, let’s get some basic definitions out of the way. A dividend is a distribution
of profits by a corporation to its shareholders. This is one way you can earn a return on investment,
without having to sell your stock. Earned dividends are considered a form of income,
meaning you have to pay taxes on it. However, the exact tax rate may change depending on
the type of dividend and your income. In the United States, there are two classifications
of dividends: qualified and nonqualified. A qualified dividend is taxed at the long-term
capital gains tax rate, which is lower than the regular income tax rate. Nonqualified
dividends, often referred to as ordinary dividends, are taxed at the higher regular income tax
rate. So I don’t know about you, but I’d like to pay less taxes. So what makes a dividend
qualified? A qualified dividend must be paid by either:
* A U.S. company * A company in U.S. possession
* A foreign company residing in a country that is eligible for benefits under a U.S.
tax treaty * Or a foreign company’s stock that can
be easily traded on a major U.S. stock market. But wait there’s more! These dividends must
also meet holding period requirements. The stock must have been held in excess of 60
days during the 121-day period beginning 60 days before the ex-dividend date.
Also, Some dividends are automatically exempt from consideration as a qualified dividend.
These include dividends paid by REITs, MLPs, those on employee stock options, and those
on tax-exempt companies. All these will be treated as nonqualified dividends.
So that may seem like a lot of requirements, but it’s actually pretty simple. As long
as you invest in eligible companies, which is most, and hold long term, then the overwhelming
majority of your long term dividend income will be considered qualified. This means you
can pay the lower tax rate. Let’s take a look at how this actually works.
In 2021, for single filers, if you make less than $40,400 in income then your dividends
will be taxed at 0%. If you make between $40,401 and $445,850 then your dividends will be taxed
at 15%, and if you make more than $445,851 then your dividends will be taxed at 20%.
This is for qualified dividends. If you look on the left side of this chart, you will see
that the respective tax rates are much higher for nonqualified dividends.
In 2021, for joint filers, if you make less than $80,800 in income then your dividends
will be taxed at 0%. If you make between $80,801 and $501,600 then your dividend will be taxed
at 15%, and if you make $501,601 or more then your dividends will be taxed at 20%. Once
again, this is for qualified dividends and the respective rates for nonqualified are
much higher. The income requirements and tax rates are
not set in stone and have been altered over time. With that said, let’s hope dividends
continue to get taxed at a lower rate. Let’s say you watched this video and thought,
“it’s sweet that dividends are taxed at a lower rate, but I’d rather not pay any
taxes”. Well luckily, there is actually a way to avoid taxes on dividends. This is
through a tax-shielded account, such as a Roth IRA. It’s a retirement account where
you contribute already-taxed money to invest. Once the money is in the account, you don’t
have to pay any taxes as long as you take it out in accordance with the rules. Before
you get too excited, there is a limit to the amount of money you can contribute annually
and you can be disqualified from contributing if you make too much income. But for the average
person, a Roth IRA is a great way to save for retirement and let your money compound
tax free. Thank you for watching Dividend Data. I’d
greatly appreciate it if you leave a like and subscribe to the channel. If you follow
me on twitter, link in the description, you can real-time updates of my buys and dividends
coming in. Also, you can follow me on instagram at dividenddata. You can support the channel
over on patreon, where you can gain access to a community discord server. The link is
in the description. Please leave a comment below and thank you for watching!