If you are an investor, you are probably looking for dividend-paying stocks as a way to bolster your portfolio. There are a number of sole proprietorships and mutual funds that are well known for paying consistent dividends. This is often seen as a great way to increase your income over time, as you can retain the shares you have purchased while also having a virtual guarantee that you will receive a certain amount of money on a quarterly or yearly basis. This is also considered a great way to supplement retirement. Sounds great right? Well, the first thing to remember about dividends is that another word is income. It’s money you get, so you can guess what that means. It means that you will have to pay taxes on the total amount of dividends you receive during the course of the year.
If you are wondering what the dividend tax rate is for 2020, the answer is that it depends on several factors. You will need to consider the type of dividends you end up receiving, the amount of income you received from those dividends, and the amount of income you earn from other sources. Read on 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 the dividends in the first place. Dividends are essentially the earnings that a company or mutual fund has made during the year. Unlike using all of the proceeds to reinvest in the portion, many companies and funds will choose to divert a portion of them to their shareholders. These are generally paid quarterly, but the frequency may vary a bit. You will find that most dividends are paid in the form of cash, but you may end up getting additional shares, rights to future shares, and even property in some cases.
When it comes to dividends, you will find that there are two types. You can earn qualified or unqualified dividends. To get a qualified dividend, that will mean that you have held the stocks or mutual fund for a specified period of time. The IRS classifies a qualified dividend as a stock that has been held for at least 61 days during the 121 days prior to the date of the ex-dividend for 60 days. Now you are beginning to see why the question of what the 2020 dividend tax rate really is is not so easy to answer.
Unqualified dividends end up being many other types of income that pay dividends that you end up getting. This may include a dividend you receive from an employee stock option or from a real estate investment trust. 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.
Do you need to pay taxes on the dividends you receive?
This is a simple answer. Yes, you must pay taxes on the dividends you receive because the IRS considers them income. You may think you have a solution in terms of taking the dividend and converting it back to stocks without putting the money in the bank, but this is still considered income. If you receive ordinary dividends, they are taxed at the same rates as ordinary income. In essence, it is simply adding to your annual income. For example, if you have annual earned income of $ 95,000 and you receive $ 7,500 in dividends, then your taxable income at that time would be $ 102,500. Qualified dividends, on the other hand, end up being taxed at a lower rate that is tied to capital gains. That tends to change from year to year, and we’ll go over the exact rates for 2020 here in a moment. There are some exceptions to the dividend rates and their corresponding tax rates that we just talked about. Two examples would be dividends you receive from the Alaska Permanent Fund or from a veterans insurance policy. In reality, you would not pay any tax on the dividends of either of these two entities.
The 2020 dividend tax rate
Now for the reason you started reading this article in the first place. As already mentioned, the tax rate 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 to 37 percent. Actually, that’s a little short of the 39.6 percent high from a few years earlier. As an example, a single taxpayer reporting $ 50,000 in total income will be in the 22 percent tax bracket when they file their 2020 tax return. That means the rate …