When considering the profit they make on stocks, many investors assess the gains they have obtained based on the appreciation of the stock on the open market or the gains they obtained after selling the stock for more than the original purchase price. However, it’s also wise to include the income acquired from stock dividends, if any.
Dividends are taxable payments to shareholders from a company’s earnings. These payments generally come from retail profits and tend to be distributed in the form of cash or stock. They are usually paid quarterly, and the amount is determined by the company’s board of directors.
Dividends are most often quoted by the dollar amount each share receives, put simply, the dividends per share. They can also be stated in terms of a percent of the current market price, designated as a dividend yield. The dividend yield is the annual dividend income per share divided by the current stock price.
Many mature, profitable companies offer regular dividends to shareholders. However, if a company experiences losses during the year or needs any earnings to be reinvested back into the business, it’s always possible that it could decide to suspend dividends. It’s important to remember that a company can decide to increase, decrease, or stop paying dividends at any time.
Rather than pay dividends to shareholders, many companies with current high growth rates choose to reinvest their earnings back into their businesses. On the other hand, some stable companies that haven’t experienced much growth might pay dividends to provide an incentive for investors to purchase their stock.
Ordinary dividends are taxed as ordinary income.
Qualified dividends meet the requirements to be taxed as capital gains, at either the 0%, 15%, or 20% rate (or breakpoint). For 2020, the 0% breakpoint will be up to $80,000 (up from $78,750 in 2019) for married taxpayers filing jointly, up to $53,600 (up from $52,750 in 2019) for head of household, and up to $40,000 (up from $39,375 in 2019) for all other filers (except estates or trusts). The 15% breakpoint will be $496,600 (up from $488,850 in 2019) for married taxpayers filing jointly, $469,050 (up from $461,700) for head of household filers, and $441,450 (up from $434,550 in 2019) for all other filers (except estates or trusts). The 20% breakpoint will be $496,600 (up from $488,850 in 2019) for married taxpayers filing jointly, $469.050 (up from $461,700 in 2019) for head of household filers, and $441,450 (up from $434,550 in 2019) for all other filers (except estates or trusts).
Higher-income taxpayers should be aware that they may be subject to an additional 3.8% Medicare unearned income tax on net investment income (unearned income includes dividends) if their adjusted gross income exceeds $200,000 (single filers) or $250,000 (married joint filers). This is an outcome of the Patient Protection and Affordable Care Act of 2010.
When investing in the stock market, it’s important to remember that the return and principal value of stocks fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost.
The information in this newsletter is not intended as tax, legal, investment, or retirement advice or recommendations, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek guidance from an independent tax or legal professional. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Broadridge Advisor Solutions. © 2020 Broadridge Investor Communication Solutions, Inc.