If you are an investor, then you probably look to dividend paying stocks as a way to beef up your portfolio. There are a number of individual companies and mutual funds that are well known for paying consistent dividends. This is often viewed as a great way to beef up your income over time, as you get to retain the shares that you have bought while being virtually ensured of a certain amount of money to come your way quarterly or annually. This is also seen as an excellent way to supplement retirement. Sounds great, right? Well, the first thing you have to remember about dividends is that another word for it is income. It is money that you get, so you can guess what that means. It means you will need to pay tax on the total amount of dividends that you receive during the course of the year.
If you are wondering what the dividend tax rate is for 2020, the answer to that is that it depends on a number of factors. You will need to consider the type of dividends that you end up receiving, how much income you received from those dividends, and how much income you have from other sources. Continue reading to learn more about the dividend tax rates that have been set for 2020.
The first thing that is important to understand is the exact nature of dividends in the first place. Dividends are essentially profits that a company or mutual fund has earned during the year. As opposed to using all of the profits to reinvest back into the portion, many companies and funds will choose to instead divert a portion of them to its shareholders. These are typically paid out every quarter, but the frequency can vary somewhat. You will find that most dividends are paid out in the form of cash, but you can end up getting additional shares of stocks, right to future shares, and even property in some cases.
When it comes to dividends, you will find that there are two types. You can either earn qualified or nonqualified dividends. To get a qualified dividend, that will mean that you have held the stock or mutual fund for a set period of time. The IRS classifies a qualified dividend as being a share that has been held for at least 61 days during the 121 days preceding the ex-dividend date by 60 days. Now you are starting to see why it is not so easy to answer the question of what the dividend tax rate for 2020 actually is.
Nonqualified dividends end up being many other types of income paying dividends that you end up getting. This can include a dividend that you receive on an employee stock option or from a real estate investment trust fund. The difference between the two types of dividends is best summed up in terms of the tax rate that you will end up paying at the end of the year.
Is It Necessary To Pay Tax On Dividends That You Receive?
This is an easy answer. Yes, you need to pay tax on dividends that you receive because this is considered to be income by the IRS. You might think that you have a workaround in terms of taking the dividend and turning it right back into stock without ever putting the money in the bank, but this is still considered income. If you receive ordinary dividends, then these are taxed at the same rates as regular income. In essence, it simply adds to your annual income. For example, if you have an annual income at work that amounts to $95,000 and you receive $7,500 in dividends, then your taxable income at that point would be $102,500. Qualified dividends, on the other hand, end up being taxes at a lower rate that is tied to capital gains. That tends to change by the year, and we go over the exact rates for 2020 here in a moment. There are some exceptions to the types of dividends and their corresponding tax rates that we just talked about. Two examples would be dividends that you receive from either the Alaska Permanent Fund or an insurance policy for veterans. You would not actually pay any tax on dividends from either of these two entities.
The 2020 Dividend Tax Rate
Now for the reason that you started to read this article in the first place. As already mentioned, the tax rate that will you pay on ordinary dividends in 2020 will be the same as you pay on regular income. For this year, the tax rate at the federal level ranges from 10 percent to 37 percent. That is actually down just a bit from a maximum of 39.6 percent a few years prior. As an example, a single taxpayer reporting $50,000 in total income will be in the 22 percent tax bracket when they go to file taxes in 2020. That means that the dividend tax rate on ordinary dividends is 22 percent.
When you to report qualified dividends, you will be paying tax at a slightly different rate. These will be taxed at the same rate as capital gains, which tend to be noticeably lower. For 2020, you will not have to pay any taxes on any qualified dividends if your ordinary income is less than $38,600. If your income is more than $38,600 but less than $425,800, then the tax rate on qualified dividends will be 15 percent. For individuals earning in excess of $425,801, the dividend tax rate on qualified dividends will be 20 percent.
As you consider the tax that you will pay on your dividends this year, you have to first break down those dividends into two different types. Understand this will know what rate you will be taxed at in the end.