A: Owning the market - by buying the Standard & Poor’s 500 - is a great way to keep costs and taxes low. But Uncle Sam usually still gets a piece.
There’s no shortage of mutual funds and exchange-traded funds that own all the stocks in the S&P 500. Such investments have infamously low annual expense ratios. These S&P 500 funds have another benefit people appreciate more in April, and that’s their tax efficiency. These funds buy or sell very few shares each year, so most generate very little in terms of taxable capital gains, if any. But there are usually taxes due on S&P 500 funds’ dividends. The exact amount of taxes varies by taxpayer, though. For most taxpayers, in the 25% or higher tax bracket, qualified dividends are taxed at 15%. The S&P 500 is currently yielding about 2%, which generates a taxable event for most. If you have $1,000 invested in the S&P 500, you would receive $20 in dividends which would be taxable. However, if you’re in the 10% or 15% tax bracket your tax rate on qualified dividends would be 0%. Remember that the exact tax you pay is tied to your tax rate and income. Also, most S&P 500 dividends are qualified for the lower dividend tax rate, but some might vary. Your brokerage tax form will give details.
USA TODAY markets reporter Matt Krantz answers a different reader question every weekday. To submit a question, e-mail Matt at mkrantz@usatoday.com or on Twitter @mattkrantz.
But there are usually taxes due on S&P 500 funds' dividends. The exact amount of taxes varies by taxpayer, though. For most taxpayers, in the 25% or higher tax bracket, qualified dividends are taxed at 15%.
Like other earnings and realized gains on investments, dividend income is taxable. The tax rate on dividends, however, is dependent on a number of factors, including your taxable income, the type of dividend, and the kind of account that holds the investment.
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%.
Your “qualified” dividends may be taxed at 0% if your taxable income falls below $44,625 (if single or Married Filing Separately), $59,750 (if Head of Household), or $89,250 (if (Married Filing Jointly or qualifying widow/widower) (tax year 2023). Above those thresholds, the qualified dividend tax rate is 15%.
The profits you make from selling an exchange-traded fund (ETF) are taxable, just like the profits from selling a stock or withdrawing money from a mutual fund. If you receive dividends from an ETF, they are taxable as well.
The S&P 500 is an index, so it does not pay dividends; however, there are mutual funds and exchange-traded funds (ETFs) that track the index, which you can invest in. If the companies in these funds pay dividends, you'll receive yours based on how many shares of the funds you hold.
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.
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.
Dividends can be classified either as ordinary or qualified. Whereas ordinary dividends are taxable as ordinary income, qualified dividends that meet certain requirements are taxed at lower capital gain rates.
If shares are held in a retirement account, stock dividends and stock splits are not taxed as they are earned. 1 Generally, in a nonretirement brokerage account, any income is taxable in the year it is received.
The maximum tax rate for qualified dividends is 20%, with a few exceptions for real estate, art, or small business stock. Ordinary dividends are taxed at income tax rates, which as of the 2023 tax year, maxes out at 37%.
Capital gains are charged with high tax amounts, while dividends have low taxes. Investors who get dividends vs. capital gains are applicable to pay tax on these gains. The tax on net capital gains depends on the asset being sold, whether long-term or short-term.
At least once a year, funds must pass on any net gains they've realized. As a fund shareholder, you could be on the hook for taxes on gains even if you haven't sold any of your shares.
Over time, the cash flow generated by those dividend payments can supplement your Social Security and pension income. Perhaps, it can even provide all the money you need to maintain your preretirement lifestyle. It is possible to live off dividends if you do a little planning.
The options that the fund uses are index options, taxed favorably as Section 1256 Contracts under IRS rules. Options held at year's end are treated as if sold at fair market value on the last market day. Any capital gains or losses are taxed as 60% long term and 40% short term, no matter how long investors hold them.
Dividends can be classified either as ordinary or qualified. Whereas ordinary dividends are taxable as ordinary income, qualified dividends that meet certain requirements are taxed at lower capital gain rates.
At least once a year, funds must pass on any net gains they've realized. As a fund shareholder, you could be on the hook for taxes on gains even if you haven't sold any of your shares.
Investing in an S&P 500 fund can instantly diversify your portfolio and is generally considered less risky. S&P 500 index funds or ETFs will track the performance of the S&P 500, which means when the S&P 500 does well, your investment will, too. (The opposite is also true, of course.)
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