A Guide to Dividend Taxes

Dividend taxes are a controversial with many investors in the stock market today. These are taxes that must be paid when a company issues a dividend to its shareholders. When a publicly held company earns money, they have to pay taxes on the amount they hold. After they pay the government taxes, they pay their shareholders a dividend. The shareholders are then required to pay taxes out of the amount that they received.

Qualified vs Unqualified

You will be required to differentiate your dividend payments into qualified and unqualified groups. If you have qualified dividends, you are going to be paying a lower tax rate than if you have unqualified dividends. In order to be a qualified dividend, you have to own the stock for 60 days. This 60 day period has to fall into a 121 day period that starts 60 days before the ex-dividend date of the stock. If your stock does not meet those qualifications, it is considered to be an unqualified dividend. If you buy stocks and hold them for the long-term, you will be eligible for qualified dividend status.

Qualified Tax Rates

If you meet the requirements for qualified dividends, you will either pay 5 or 15 percent in taxes. If you are below the 25 percent personal income tax bracket, you will be taxed 5 percent. If you are in the 25 percent tax bracket or above, you will be required to pay 15 percent on your dividend taxes.

Unqualified Tax Rate

If your dividends are considered to be unqualified, you will have to pay taxes at your regular marginal tax rate. If you are in the highest tax bracket, this means that you are going to have to pay taxes on your dividends at 35 percent. In the lowest tax bracket, you will pay taxes on them at 15 percent.

Controversy

In the investment world, there is a growing amount of controversy about this system. Under the current rules, the government is double taxing dividends. In essence, you have to pay taxes on the same money twice. The corporation is paying taxes on the profits when they are earned. Then when the money is distributed to the shareholders, the shareholders have to pay taxes on the money also. This creates a situation of double taxation.

Many investors believe that the government should only be able to charge taxes on the money once. They argue that this would improve the economy and help individual investors. Even though there has been a lot of debate on this issue, the government has not shown any willingness to eliminate this rule. They rely heavily on corporate taxation and personal income tax at the same time. In order for such a huge change to take place, the economy should be strong and viable, without much of a national debt.

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