Investors are relying on dividend-paying investments now more than ever to get the income they need. But many get confused about why there are so many different tax rates that apply to dividend investments.
In the following video, Dan Caplinger, The Motley Fool's director of investment planning, goes through the rules, pointing out that rates of 0%, 15%, or 20% can apply to qualified dividends on ordinary stocks that are eligible for preferential rates. These stocks include not only high-yielding Frontier Communications (FTR) and other U.S. income-producing stocks but also U.S.-listed foreign stocks like BP (BP -1.65%). Dan also notes that Annaly Capital (NLY 3.16%), American Capital Agency (AGNC 1.66%), and other real-estate investment trusts often produce ordinary income because of their status as pass-through entities. Moreover, Dan goes through the taxation of Kinder Morgan Energy Partners (NYSE: KMP) and other master limited partnerships, which incur different types of taxes on their distributions because of the special rules applying to energy companies. Dan concludes that unless you use a tax-deferred account, keeping track of all these rates is important to make sure you know how much tax you'll have to pay.