Happy Friday! In today’s email:

• A Lesson On How Your Dividends Are Taxed

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  • S&P 500 = +2.84%

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How Your Dividends Are Taxed

When people hear the word “dividend” they may assume “free money”. However, that is not the case. Dividends are the percentage of a company's earnings that are paid to its shareholders as their share of the profits. It is like taking money from one pocket and moving it to the other. Pocket 2 has more money, however Pocket 1 has an equal amount of less money. Therefore you do not have MORE money, just simply moved where the money is located. This is a great explanation of what dividends are:

How are dividends taxed?

There are 2 ways dividends are taxed:

1. Qualified Dividends: These are dividends that are (1) paid by a U.S. corporation or qualifying foreign entity. For many investors, this condition is easy to satisfy. (2) It is actually a dividend in the eyes of the IRS. Some things don’t count as dividends, including (a) Premiums that an insurance company pays back. (b) Annual distributions credit unions make to members. (c) “Dividends” from co-ops or tax-exempt organizations. (3) You held the underlying security for long enough. The definition of "enough" gets a little tricky, but typically, if you owned the security for more than 60 days during the 121-day period that began 60 days before the ex-dividend date. (Here's an example. If your Walmart shares paid a dividend Sept. 1 and the ex-dividend date was July 20, you would need to have owned your shares for at least 61 days between May 21 and Sept. 19. And when you count the days, include the day you sold the shares, but not the day you bought them.)

   • I know that is a lot of info, but essentially if you satisfy these requirements, you will be paying a lower tax rate on your dividends earned. For qualified dividends, here are the 2024 tax rates:

2. Non-Qualified Dividends (sometimes called Ordinary): If you do not satisfy the three requirements above, your dividends will be deemed non-qualified. In this case, you are taxed as income at rates up to 37%. The tax rate on non-qualified dividends follows ordinary income tax rates and brackets.

Reminder: If you receive dividends in a tax sheltered account (401k, IRA etc.), then you will not owe taxes on those dividends as long as you keep the earnings within the account. This is why most people usually recommend holding those high dividend stocks in a tax sheltered account.

What is the takeaway? While dividends are great, it is important to know how your dividends are taxed. For me, I have ETFs that pay dividends, however I just DRIP (dividend reinvestment plan) those into buying more shares of the same ETF.

Source for info: https://www.nerdwallet.com/article/taxes/dividend-tax-rate

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