Stock dividends are taxable income.
Whether you decide to reinvest dividend to help your investments grow over time, or you take the dividends out in cash and spend them when they are issued, you will receive a 1099-DIV at the end of the year for the total dividend paid to you.
Dividend payments will be classified as either qualified or unqualified. What are qualified dividends?
Unqualified dividends are taxed as ordinary income at your tax rate (the rate depends on your tax bracket,) and qualified dividends are taxed a lower capital gains tax rate (which also depends on your total income and will range from 0% to 20% based on your situation.) Here is a link with a video that explains this.
Speaking of capital gains, if you decide to sell your stock investment, you will pay capital gains taxes on the profit you make from that sale.
For example, you if pay $100 for the stock, and then sell it 2 years later for $150, you will pay tax on your capital gain of $50. This gain would be at the long term capital gains rate (because you held it for more than 1 year.) Same situation, but instead of selling for $150 in 2 years, you sell it in 6 months - then you have a short term capital gain, which does not get the reduced capital gains tax rate (and the gain will be taxed at your ordinary income tax rate.)
Clarissa
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