Investing in financial markets can be an exciting journey, especially when you start seeing returns on your investments. Wouldn’t it be great if you were being paid regularly for owning some of the investments that you use to help build your wealth? This would be especially nice if it were happening while you sleep. One-way companies reward their shareholders is through dividends. This sounds powerful, but what exactly are dividends, and what’s the difference between ordinary dividends and qualified dividends? Let’s take a look!
What is a Dividend?
A dividend is a portion of a company’s earnings that is distributed to its shareholders. Companies that generate profits may choose to share a part of these profits with their investors as a way to reward them for their investment. Dividends can be issued in various forms, such as cash payments, additional shares of stock, or other property.
Types of Dividends
There are two main types of dividends you should be aware of: ordinary dividends and qualified dividends. Understanding the difference between these two can help you make more informed investment decisions and optimize your wealth-building and lower your tax situation.
Key Differences Ordinary Dividends vs. Qualified Dividends
Tax Rates: Ordinary dividends are taxed at your regular income tax rate. For example, if you’re in the 22% tax bracket, your ordinary dividends will be taxed at 22%; while qualified dividends are taxed at the lower long-term capital gains rates. The tax rates for qualified dividends are significantly lower than those for ordinary dividends, typically 0%, 15%, or 20%, depending on your taxable income and filing status.
Eligibility: To qualify for the lower tax rate, dividends must meet specific IRS criteria, including the holding period requirement.
How are Dividends Paid: Both types of dividends are paid out of a company’s earnings, but qualified dividends must come from U.S. corporations or qualified foreign corporations.
How to Find Out if a Dividend is Ordinary or Qualified
From your brokerage statements. Your brokerage statements or 1099-DIV forms will typically indicate whether dividends are qualified or ordinary. Look for the section that specifies “qualified dividends.”
Why It Matters
Understanding the difference between ordinary and qualified dividends is crucial for wealth accumulation and tax planning. By holding Stocks, Mutual Funds, or ETFs that pay qualified dividends, you can potentially reduce your tax liability and keep more of your investment returns. It’s also important to consider the holding period requirement to ensure your dividends qualify for the lower tax rate.
Conclusion
Dividends can be a great way to earn passive income from your investments. It’s also great knowing that these payments can happen even while you are sleeping. By knowing the difference between ordinary and qualified dividends, you can make smarter investment choices and optimize growing your wealth and improving your tax situation. If you need help with selecting the dividend investments that will work for you, please contact Paycheck to Wealth to get started. Happy investing!