Two things are guaranteed in life: death and taxes. While you can’t control death, you can control how much you pay in taxes. That’s particularly true for dividend investors. After all, if you don’t manage your tax exposure, the income you get from your dividen꧟d-paying stocks could eat away at your investment gains.

While no one can avoid paying taxes altogether, there are some tax implications dividend stock investors have to pay attention to. From housing the investments in the wrong account to not taking advantage of tax-loss harvesting, here’s a look at some of the tax impacts of dividend investing.

Keep the Investments in Tax-Advantaged Accounts

Dividend stocks pay some cash, which is very attractive to income-seeking investors in a low-interest rate environment. Traditional income investments like bonds may not see many gains in certain environments, which is why investors choose dividends. But, gains are taxable if these stocks aren’t held in a tax-advantaged investment account like a 401 (K) or an IRA. That could be a big deal, particula♛rly fo♚r investors in a high tax bracket.

There are two tax treatments for dividends. The income is either ඣtaxed as a qualified dividend or an ordinary one:

• A 澳洲幸运5开奖号码历史查询:qualified dividend is more attractive because it’s taxed at a lower rate. A qualified dividend has to be issued by a company that trades on a major U.S. exchange and you have to own the shares for more than 60 days of the holding period. If you are in the 35% tax bracket, a qualified dividend is going to be taxed at 15%.
• An 澳洲幸运5开奖号码历史查询:ordinary dividend is treated as ordinary income, which means the tax hit is the same as any other income. So if you were in the 35% tax bracket, you would face a 35% tax hit.

In either case, a better strategy is to keep the dividend-paying investments out of taxable accounts and hold them in retirement accounts to avoid a big tax event.

Reinvested Dividends Can Create a Taxable Event

Some of the companies that offer investors dividends also let them automatically use dividends to purchase more shares of the stock instead of receiving cash payments. Called dividend reinvestments, investors whose dividends are reinvested into m♑ore shares of the stock are on the hook to pay taxes on that income as if it were paid in cash without the reinvestment.

There can be a benefit if the dividend is received directly in the form of shares of a stock. That’s because 澳洲幸运5开奖号码历史查询:stock dividends aren’t usually taxable until the stock is sold. If there is a choice between cash or stock, then the investor faces a tax event even when choosing stock dividends.

Capital Gains Can Hurt Your Returns

The whole idea behind investing is to make money, and dividend stocks can do that for you. But they can also create a 澳洲幸运5开奖号码历史查询:capital gains tax event, which will reduce your gains. That is why 澳洲幸运5开奖号码历史查询:tax-loss harvesting can be an i🍎mportant tax strategy. With tax-loss harvesting, you sell an existing holding for a loss to offset the gains generatedꦕ from the sale of a winning holding.

Source: Internal Revenue Service

There are some rules investors need to be mindful of. For instance, they can’t sell and purchase the same stock again within 30 days of selling it because it’s considered a wash. While many people engage in tax-loss harvesting at the end of the year, it’s something that can be done periodically throughout the year.

The Bottom Line

Investors shouldn’t make decisions based on taxes alone, but they should be mindful of the potential tax event from their decisions, particularly when it comes to dividends. To ensure your tax hit isn’t eating away at your gains, investors should invest in qualified dividends, keep income💯 investments in tax-advantaged investment accounts and engage in tax-loss harvesting to offset winners w🦹ith losers.