Do I Have to Pay Taxes on Stock Dividends?

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Most people are aware that holding certain types of stocks over a long period can be an effective way to build wealth. However, some of these stocks pay out dividends as you continue to hold them. You may be wondering, do I have to pay taxes on the stock dividends?

Yes, you are required to pay taxes on dividend payouts from stocks that you own. The dividend tax rate is determined by whether the dividend is qualified or non-qualified.

This article examines how dividend payouts are taxed. Additionally, we look at how the sale of taxes is taxed and how to limit the taxes paid on both dividends and stock sales.

Do I Have to Pay Taxes on Stock Dividends?

Most stocks payout dividends on a monthly, quarterly, or annual basis. The frequency of a stock or bonds dividend payout is typically listed on your brokerage site under "dividend frequency."

The dividends you receive are a small fraction of the company's profits that are paid out due to you owning a fraction of the company.

Like most forms of income, dividends are subject to taxation. Therefore, even if you don't sell a stock in a given year, you can still owe taxes on the dividend payouts.

Dividend tax rates vary depending on how long you've owned a stock and how much money you make. Dividends are classified in two different ways:

  • Qualified dividends - Common stocks that are generally held for 60 stays and preferred stocks that are held for 90 days. Qualified dividends are subject to the long-term capital gains rate of taxation.
  • Non-qualified dividends - Any dividend that doesn't count as a qualified dividend. These are subject to the short-term capital gains rate of taxation.

Due to the IRS's lengthy and comprehensive rules, determining whether a dividend is qualified may be difficult. If you earn $10 or more in dividends, your brokerage is required to issue you a Form 1099-DIV. The Form-1099 DIV notifies you whether or not your dividends are qualified, removing any uncertainty.

Paying Taxes When Profiting from the Sale of Stocks

When you sell a stock for a profit, the difference between the price you purchased a stock for and the price you bought a stock for is considered a capital gain. These gains are subject to taxation by the government.

Paying Taxes on Short-Term Capital Gains

Profits on selling a stock that you own for less than a year is considered a short-term capital gain. Profits from the sale of short-term assets are taxed at the same rate as your general income.

You can anticipate paying the same tax rate on short-term stock sales as you do on your day job, as long the sale of short-term stocks doesn't push you into a different tax category. Therefore, day-traders should be wary of how the frequent sale of stocks impacts their year-end tax bill.

You can find the 2022 tax brackets on the IRS website to determine which tax bracket you fall in.

Taxes on Long-Term Capital Gains

Stocks held for longer than a year typically receive a more favorable tax rate. These types of gains are considered long-term capital gains.

Profits from the sale of taxes that fall into this category are usually taxed at 15%, but the amount varies depending on your income. Long-term capital gains brackets in 2022 include:

RateSingleMarried, filing jointlyMarried, filing separatelyHead of Household
20%$459,751 & up$517,201 & up$258,601 & up$488,501 & up

Source: IRS

Long-term capital gains can save you a lot of money on taxes. For example, if you make $10,000 in profits for a given year and you make $100,000 overall, you'd pay $1,500 in taxes. However, if the same sale were taxed at the short-term rate, you'd pay $3,200 in taxes. That's over double the amount owed in taxes!

Additional Taxes for High-Income Earners

The IRS requires high-income earners to pay an extra 3.8 percent net investment income tax (NIIT) on all stock profits. For high-income earners in 2022, the following thresholds apply:

Filing StatusIncome
Married filing jointly$250,000
Married filing separately$125,000
Head of Household$200,000
Qualifying widower$250,000

Source: IRS

The NIIT is charged regardless of whether the sale of an asset is a long-term or short-term gain.

Strategies for Limiting Taxes on Capital Gains

While dividends and stock sales can result in a rather hefty tax bill, several strategies can be used to limit the taxes owed on these profits. A few of the most commonly used strategies include:

  • Tax-advantaged accounts - There are several different types of investment accounts that provide a significant tax benefit when used effectively. These include a Roth IRA, 401(k), 403(b), 529 plan, and several others.
  • Tax-loss harvesting - You can use the sale of stocks you lost money on to offset gains. Losses can often be carried over from year to year if they are greater than your gains.
  • Donate to charity - If you donate a stock to a charity you can deduct the market value of the stock at the time when it was donated. Since you didn't sell the stock, you don't have to pay capital gains on profits.
  • Sell when you have a low income - If your income fluctuates year to year, consider selling your stocks in a low-income year. Therefore, you pay the least amount in taxes and account for some of the missed income.

Even though we haven't talked about all the ways you can limit the taxes you have to pay when selling stocks, this is a great place to start figuring out how these strategies work for you.

Where Can I Learn More?

Our blog offers a lot of information about taxes on stocks or just taxes in general. In addition, we put up new articles every week with tips on understanding taxes and how to avoid them.

Additionally, reach out to us today if you want help with your personal tax situation. Our tax experts can help you with your own taxes for a small fraction of what you would pay an accountant.

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