Dividends and Taxes - Fidelity (2024)

To lower your tax rate on income, consider owning investments that pay qualified dividends. These dividends are federally taxable at the capital gains rate, which depends on the investor's modified adjusted gross income (AGI) and taxable income (the current rates are 0%, 15%, 18.8%, and 23.8%).

What constitutes a "qualified" dividend? Most dividends paid by domestic companies and many dividends paid by foreign companies are qualified and taxed at the preferred tax rate. However, distributions paid by real estate investment trusts, master limited partnerships, and other similar "pass-through" entities might not qualify for favored tax status. Also, dividends paid on shares that are not held at least 61 days in the 121-day period surrounding the ex-dividend date are not "qualified" dividends.

How dividends are taxed is very important when considering investments for cash flow. Interest from money markets, bank CDs, and bonds is taxed at ordinary tax rates. That means a person in the top tax bracket pays taxes on interest payments up to 37%. If you compare that to the maximum 23.8 % tax on qualified dividends, the "after-tax" returns are significantly better with dividends.

Say you put $100,000 into a bank CD paying 2% annual interest. You'll receive $2,000 in interest. If you are in the top tax bracket, your after-tax yield (assuming the investment is held outside of a retirement account) is 1.26%. You can calculate that percentage by applying your tax rate of 37% to the $2,000 interest payment, which leaves you with after-tax interest of $1,260 (or an after-tax yield of 1.26%). However, if you invest the same $100,000 in a basket of stocks paying 2% in dividends annually, you'll receive $2,000 in dividends and only lose $476 to taxes (23.8% of $2,000), for an after-tax yield of 1.5% ($1,524 in after-tax dividends divided by $100,000 investment).

Of course dividend-paying stocks offer greater risk than bank CDs in terms of volatility in investment value, so investors should consider their own risk profiles when choosing income investments. Still, when comparing investments for cash flow, smart investors look at both pre-tax and after-tax yields. After all, it’s not what you make. It's what you keep.

FAQs

Will Fidelity answer tax questions? ›

Fidelity does not provide legal or tax advice, and the information provided is general in nature and should not be considered legal or tax advice. Consult an attorney, tax professional, or other advisor regarding your specific legal or tax situation.

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How much tax will I pay on my dividend income? ›

How dividends are taxed depends on your income, filing status and whether the dividend is qualified or nonqualified. Qualified dividends are taxed at 0%, 15% or 20% depending on taxable income and filing status. Nonqualified dividends are taxed as income at rates up to 37%.

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How do I find out how much dividends I paid on Fidelity? ›

Once you have logged into your Fidelity account, navigate to the 'Accounts & Trade' section and select the account for which you want to check dividends. Look for the 'Statements & Records' option to review your recent account statements.

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How are dividends taxed Fidelity? ›

These dividends are federally taxable at the capital gains rate, which depends on the investor's modified adjusted gross income (AGI) and taxable income (the current rates are 0%, 15%, 18.8%, and 23.8%).

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Does Fidelity give tax advice? ›

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Will the IRS answer tax questions? ›

The IRS helps taxpayers get forms and publications and answers a wide range of tax questions.

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How to avoid paying taxes on dividends? ›

You may be able to avoid all income taxes on dividends if your income is low enough to qualify for zero capital gains if you invest in a Roth retirement account or buy dividend stocks in a tax-advantaged education account.

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Do I have to pay taxes on dividends? ›

Since the IRS considers dividends to be income, you usually need to pay taxes on them. Even if you reinvest all of your dividends directly back into the same company or fund that paid you the dividends, you will pay taxes as they technically still pass through your hands.

Do you pay taxes on reinvested dividends? ›

Dividends from stocks or funds are taxable income, whether you receive them or reinvest them. Qualified dividends are taxed at lower capital gains rates; unqualified dividends as ordinary income. Putting dividend-paying stocks in tax-advantaged accounts can help you avoid or delay the taxes due.

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Does Fidelity keep track of dividends? ›

Utilizing Fidelity for dividend tracking offers investors advanced portfolio analysis tools, real-time updates on dividend payments, and seamless integration of dividend data into investment strategies.

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Does Fidelity automatically reinvest dividends? ›

With full dividend reinvestment in Fidelity, investors can benefit from maximizing their investment performance by automatically reinvesting their entire dividend distributions.

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When to stop reinvesting dividends? ›

There are times when it makes better sense to take the cash instead of reinvesting dividends. These include when you are at or close to retirement and you need the money; when the stock or fund isn't performing well; when you want to diversify your portfolio; and when reinvesting unbalances your portfolio.

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How much taxes does Fidelity take out? ›

Federal Tax Withholding Elections

For IRAs other than Roth, IRS regulations require that Fidelity withhold 10% of the gross distribution (or withdrawal). Federal income tax will not be withheld from distributions from a Roth IRA unless you elect to have such tax withheld.

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Do dividends count as income? ›

All dividends paid to shareholders must be included on their gross income, but qualified dividends will get more favorable tax treatment. A qualified dividend is taxed at the capital gains tax rate, while ordinary dividends are taxed at standard federal income tax rates.

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Are reinvested dividends taxed twice? ›

Dividends are taxable regardless of whether you take them in cash or reinvest them in the mutual fund that pays them out. You incur the tax liability in the year in which the dividends are reinvested.

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Does Fidelity report to the IRS? ›

The IRS Form 1099-B is part of the non-exempt Fidelity Tax Reporting Statement and is also part of the information that we are required to report to the IRS.

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Does Fidelity keep track of taxes? ›

For Fidelity's ETF, Fidelity calculates both Return After Taxes on Distributions and Return After Taxes on Distributions and Sale of Shares consistent with the SEC prescribed methodology for open-end management investment companies.