Did you know that even in 2020, the S&P 500 will pay out $479.1 billion in dividends?
Even in a year mired with a global pandemic and market lows, the sheer value of dividends paid to investors on an annual basis is truly mindboggling.
Yet, as with any type of money floating around the market, it’s not free money, and it’s usually considered to be taxable income. If you’re unfamiliar with what a dividend income entails, as well as what the rate of dividend tax looks like, you’ve come to the right place.
Keep on reading for our full breakdown of dividend income, its different types, and the tax rates that you should expect to see during tax season.
What Is Dividend Income?
In the simplest of terms, a dividend is a bit of profit that’s distributed from a corporation to its shareholders on a regular basis.
They can come in the form of cash, but they can also be dispersed in the form of stocks, stock options, property, debt payments, and even services rendered.
It’s a type of income that you’ll usually see reported on a Form 1099-DIV to the IRS. Generally speaking, you won’t have to hunt down this form, you’ll automatically receive one if you’ve gotten dividends of $10 or more, per tax season.
The Types of Dividends and Tax Rates
Needless to say, regardless of the type of dividend you’re receiving, you should take advantage of captive insurance, considering the current volatility of the market.
But, for now, let’s take a look at the two main types of dividends and their tax rates.
The first is the ordinary dividends. These are as common as they sound, and they tend to be paid out from the earnings of a corporation. Traditionally, any dividend is considered an ordinary dividend unless explicitly stated otherwise. This type of dividend is taxed as ordinary income. An income tax calculator might be useful in determining how dividends will affect your income as far as taxes are concerned
As for the second type, the qualified dividends, things are a bit different.
These dividends need to meet a specific threshold to be considered capital gains and will be taxed as such. According to the current laws, you’ll find that these dividends are taxed at the rates of 0%, 15%, or 20%. These rates are linked to your tax bracket.
In addition, keep in mind that all dividends are taxable, thus they must be reported. That spans dividends that have been reinvested to purchase stock. And, if you didn’t receive any form, you’ll still have to report your dividend income on your tax return.
Ready to Give Your Finances a Boost?
For the uninitiated investor, the whole process of taxable dividend income might be a bit overwhelming at first.
However, we hope our little guide was enough to make you feel a bit more comfortable with the process, and have a better understanding of what dividend income is all about, and its tax rates.
At this point, you’ll probably want to brush up on your investment strategy and get more fresh insight into how to better your finances. Make sure to check out our finance and business section for all the tips you could possibly need.
