At Pier we invest in companies that pay qualified dividends to provide income for our clients. This type of dividend has a tax advantage compared to some other forms of investment earnings.
Qualified dividends are taxed at a much lower rate than ordinary income.
According to the IRS Publication 550 (2011), Investment Income and Expenses,
“Qualified dividends are subject to the 15% rate if the regular tax rate that would apply is 25% or higher. If the regular tax rate that would apply is lower than 25%, qualified dividends are subject to the 0% rate.”
Did you catch that?
- If your regular tax rate is 25% or higher, you only pay 15% taxes on your qualified dividend earnings.
- If your regular tax rate is lower than 25%, the tax rate for your qualified dividend earnings is zero!
Every percentage point in tax savings will make a difference in your after-tax rate of return. That’s especially needed when the market is flat or down.
Here’s another advantage. Long-term investing has a lower capital gains tax rate compared to short-term trading. Companies that pay qualified dividends tend to be held for the long term by investors. They can provide stability and consistent performance in an investment portfolio. These are stocks that you invest to keep instead of actively trade.
When you compare the possible earnings from various types of investments, consider how much you will end up paying in taxes. Generally,
- Long-term capital gains and qualified dividends are subject to the 0% or 15% tax rate.
- Interest, short-term capital gains, and annuity gains are taxed at an ordinary income rate.
This summary is for educational purposes. Consult a tax professional for personal tax advice.
Keep reading…How to Invest With Pier