Thanks for coming back for Part 2! As always, let us know if you have any questions. As a reminder: always double check tax regulations with your financial advisors, as they can change year to year.

Dividends

A dividend is money you can get from owning a stock. When you own stock in a company, it means you’re a partial owner of the company, and therefore, you’re entitled to some of the company’s profits.

If a company has an overflow of cash, they may decide, “Let’s pay some of this money to our shareholders.” That’s a dividend. Therefore, if you’re a stockholder, you might be collecting checks throughout the year from your different stocks.

Right now, dividends are taxed at the same rate as long-term capital gains. That means if you’re in the 10 to 15 percent tax bracket, you don’t owe any taxes on your dividends.

People who aren’t in the highest tax bracket owe 15 percent on the dividends, and people in the very highest tax brackets owe 20 percent on their dividend income.

This only applies to investments in a regular brokerage account. We’re not talking about retirement accounts right now.

With brokerage accounts, if you make dividends or long-term gains, they’re taxable even if you reinvest the money back into more investments.

Companies usually give you the option to automatically use your dividends to buy more stock. Even if you make that move and it’s in a regular brokerage account, you’re still going to need to pay taxes on those dividends.

With the fiscal cliff, there’s one other tax that was added for high income earners. There’s a brand new 3.8 percent investment income tax for singles making over $200,000 and couples making over $250,000.

People making investment incomes in those tax brackets, also have another 3.8 percent added to their investment income, as of 2013.

This may seem a bit complicated right now. However, we will continue to learn more about these government tax changes that have practically rewritten the entire investment code.

“Where there is an income tax, the just man will pay more and the unjust less on the same amount of income.” 

~Plato

Stay tuned for more!