Most of us can appreciate that if we own a company, we get to put our greedy little hands on whatever profits the company makes. If you are the owner of The Best Widget Company, for example, you don't have to wait to sell the company to start raking in the dough. All that sweet widget money is coming in on a rolling basis.
If you own stock in a company, the same kind of rules apply. You don't have to buy the stock and wait, crossing your fingers, for the stock to go up before selling it to get your dough. Instead, companies like rewarding investors by paying dividends every once in a while. It may be cash, property – it could even be more stock (which, let's be honest, is like getting an IOU in your Christmas stocking.). Whatever the case, you might be on the receiving end of a bit of profit if you're the proud owner of a stock or two. Now keep in mind this doesn't happen with every company; about 80 percent of Fortune 500 companies pay dividends [source: Ruffenach]. But make no mistake: If you make a profit, Uncle Sam wants to make a little profit too.
It does depend on what kind of dividends you're receiving: qualified or non-qualified.
Most dividends can be referred to as "ordinary" or "non-qualified" dividends, and they're going to be taxed like any other income you report. In fact, saying the whole "non-qualified" business just means they don't meet the requirements for special tax treatment.
This brings us to qualified dividends, which get their own fancy tax requirements and exceptions. The good news about qualified dividends is that they're taxed at a lower rate. They're considered capital gains, because you have to hold your stock for a certain number of days. The bad news is that you do have to figure out where you fit in the scheme; it's not just a flat tax rate or cut.
But don't fear that the IRS is going to make you fill out a complicated algorithm. Your tax bracket alone is going to influence your qualified dividends tax rate. And here's something nice: If you're in the 10 to 15 percent bracket, then you're not going to be taxed anything on qualified dividends. If you're in the 25 to 35 percent tax bracket, your qualified dividends will be taxed at 15 percent. In a bracket above 35 percent? Well, lucky you – but you'll have to pay 20 percent on those qualified dividends and long-term capital gains [source: Wells Fargo].
- H&R Block. "Dividends." 2014. (Sept. 26, 2014) http://www.investopedia.com/ask/answers/05/stockcashdividend.asp
- H&R Block. "Stock dividends." 2014. (Sept. 26, 2014) https://www.hrblock.com/free-tax-tips-calculators/tax-help-articles/Investments/Stock-Dividends.html?action=ga&aid=27032&out=vm
- H&R Block. "Dividends." 2014. (Sept. 26, 2014) http://www.hrblock.com/free-tax-tips-calculators/tax-help-articles/Income/Dividends.html?action=ga&aid=64622&out=vm
- Investopedia. "Capital Gains." 2014. (Sept. 26, 2014) http://www.investopedia.com/terms/c/capitalgain.asp
- IRS. "Dividends and other distributions." (Sept. 26, 2014) http://www.irs.gov/publications/p17/ch08.html
- Ruffenach, Glenn. "Navigating the dividend storm." The Wall Street Journal. Jan. 10, 2013. (Sept. 26, 2014) http://online.wsj.com/news/articles/SB10001424127887323689604578219952168695148
- TurboTax. "Guide to taxes on dividends." Intuit. 2014. (Sept. 26, 2014) https://turbotax.intuit.com/tax-tools/tax-tips/Investments-and-Taxes/Guide-to-Taxes-on-Dividends/INF19201.html
- Wells Fargo. "Tax treatment of dividend income." 2014. (Sept. 26, 2014) https://www.wellsfargoadvisors.com/market-economy/financial-articles/investing/dividend-income-tax.htm