Q: I bought my first stock a few months ago, and just received my first dividend payment. Will I have to pay tax on this income?
The short answer? It depends.
The rate at which dividends are taxed hinges on two main factors: your marginal tax bracket and whether the dividend is "qualified" or not.
To be qualified, a dividend needs to meet two basic requirements. First, it must be paid by a U.S. corporation or a foreign corporation traded on a major U.S. stock exchange. Second, you must have owned the stock for more than 60 days in the 121-day period staring 60 days prior to the ex-dividend date.
Furthermore, dividends paid by pass-through companies such as real estate investment trusts typically aren't considered to be qualified.
If your dividend isn't a qualified dividend, it will be taxed as ordinary income at your marginal tax rate, or tax bracket. If your dividend is qualified, it is taxed at more favorable rates of 0% for the two lowest tax brackets, 15% for the 25%-35% tax brackets, and 20% for the top tax bracket. High earners are also subject to an additional 3.8% net investment income surtax, regardless of whether their dividends are qualified or not.
Finally, if you hold your dividend stock in an IRA, you won't have to pay any dividend taxes on an ongoing basis. Rather, any withdrawals from a traditional IRA will be treated as ordinary income, but you won't pay a penny as long as you leave the money in the account. And with a Roth IRA, any qualified distributions, even those that represent dividend income, are completely tax-free.
