Ask a Fool: How Are My Dividends Taxed?

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Q: I bought my first stock a few months ago, and just received my first dividend payment. Will I have to pay tax on this income?

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The short answer? It depends.

The rate at which dividends are taxed hinges on two main factors: your marginal tax bracket and whether the dividend is "qualified" or not.

To be qualified, a dividend needs to meet two basic requirements. First, it must be paid by a U.S. corporation or a foreign corporation traded on a major U.S. stock exchange. Second, you must have owned the stock for more than 60 days in the 121-day period staring 60 days prior to the ex-dividend date.

Furthermore, dividends paid by pass-through companies such as real estate investment trusts typically aren't considered to be qualified.

If your dividend isn't a qualified dividend, it will be taxed as ordinary income at your marginal tax rate, or tax bracket. If your dividend is qualified, it is taxed at more favorable rates of 0% for the two lowest tax brackets, 15% for the 25%-35% tax brackets, and 20% for the top tax bracket. High earners are also subject to an additional 3.8% net investment income surtax, regardless of whether their dividends are qualified or not.

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Finally, if you hold your dividend stock in an IRA, you won't have to pay any dividend taxes on an ongoing basis. Rather, any withdrawals from a traditional IRA will be treated as ordinary income, but you won't pay a penny as long as you leave the money in the account. And with a Roth IRA, any qualified distributions, even those that represent dividend income, are completely tax-free.

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