Warren Buffett is under fire for avoiding taxes. Give him a break.

warren buffett
Warren Buffett.

OPINION

  • Warren Buffett is getting roasted for avoiding taxes after ProPublica’s bombshell report.
  • The billionaire investor is donating almost all of his money to good causes.
  • Buffett lives modestly, supports higher taxes on the wealthy, and doesn’t use popular tax loopholes.
  • See more stories on Insider’s business page.

Warren Buffett is being cast as the face of billionaire greed after ProPublica reported this week that he pays very little in federal income taxes relative to his vast wealth.

However, the investor’s minimal tax bill seems far less outrageous when viewed in the context of his modest lifestyle, philanthropic efforts, the nature of his company and its shareholders, his calls to raise taxes on the wealthy, and his refusal to use popular tax loopholes.

The case against Buffett

ProPublica analyzed leaked copies of Buffett’s tax returns between 2014 and 2018, and found the Berkshire Hathaway CEO paid just $24 million in federal income taxes on $125 million of reported income. The non-profit publication emphasized how little tax he paid by pointing out that his net worth grew by an estimated $24 billion in that five-year period.

“No one among the 25 wealthiest avoided as much tax as Buffett, the grandfatherly centibillionaire,” ProPublica declared.

Read more: Warren Buffett is hoarding $80 billion of cash, cleaning up his stock portfolio, and declining to bash bitcoin. Veteran investor Thomas Russo says why that strategy will ultimately pay off.

Politicians including Sen. Chris Murphy, Sen. Bernie Sanders, Sen. Elizabeth Warren, and Rep. Pramila Jayapal rushed to condemn Buffett and his fellow billionaires, calling for heftier taxes on the super rich and the closure of loopholes in tax laws.

ProPublica highlighted Buffett’s two main strategies to minimize his income, and therefore his taxes. The investor keeps over 99% of his wealth in Berkshire stock – which isn’t taxed until sold – and his company doesn’t pay a dividend, which shareholders would have to pay taxes on.

Not a typical billionaire

ProPublica reported that billionaires such as Amazon CEO Jeff Bezos and Tesla CEO Elon Musk paid no federal income taxes in some years, partly by taking out loans and deducting the interest paid on them from their incomes. There’s no indication that Buffett uses the same tricks; the investor said in 2016 that he has paid taxes every year since 1944.

Bezos is reportedly building a yacht so large that it comes with a support yacht, while Musk previously boasted a real-estate portfolio valued at north of $100 million – although he appears to have sold most of it to fund his dream of colonizing Mars.

The 90-year-old Buffett lives far less extravagantly. He resides in the same house in Omaha, Nebraska that he bought for less than $32,000 in 1958 ($290,000 in today’s dollars). He grabs breakfast at McDonald’s on his daily drive to Berkshire headquarters, guzzles Coca-Cola, and snacks on See’s Candies. He treats himself with an occasional trip to Dairy Queen, and entertains himself by playing online bridge.

The investor doesn’t use a company car, belong to any clubs where Berkshire pays his dues, or commandeer company-owned aircraft for his personal use – even though Berkshire owns NetJets, which sells fractional ownership of private jets.

Buffett also buys damaged cars and has them repaired to save money, and drove the same Cadillac for eight years until his daughter told him it was embarrassing and badgered him into upgrading to a newer model in 2014.

Notably, the Berkshire chief has drawn a $100,000 annual salary for the past 40 years – a fraction of the $15 million average pay of S&P 500 CEOs in 2019 – and doesn’t receive bonuses or stock options. While some details might be embellished, it’s clear that he lives a modest lifestyle relative to other billionaires.

Giving it all away

Buffett defended his tiny tax bill in a detailed statement to ProPublica, explaining that he’s pledged to donate more than 99% of his fortune to good causes. He’s donated about half of his Berkshire stock – worth about $100 billion at the current stock price – to five foundations since 2006.

The Berkshire chief told ProPublica that he prefers to hand his money to charitable organizations such as the Bill and Melinda Gates Foundation instead of the government.

“I believe the money will be of more use to society if disbursed philanthropically than if it is used to slightly reduce an ever-increasing US debt,” he said.

Read more: Warren Buffett’s Berkshire Hathaway has $140 billion in cash, yet it pulled billions out of Apple, Costco, and Chevron. Veteran investor Chris Bloomstran explains why the cash pile isn’t excessive and the sales made sense.

Buffett, aware that skeptics would likely dismiss his charity as a tax write-off, added that he’s only garnered 50 cents in tax benefits for every $1,000 he’s donated over the past 15 years.

The investor made a similar point in 2016, after Donald Trump accused him of taking a massive tax deduction. Buffett shared the details of his 2015 tax return, highlighting that he paid $1.8 million in federal income tax on $11.6 million of gross income, and only deducted $3.5 million for charitable contributions despite giving almost $2.9 billion to charity that year.

Moreover, Buffett noted that only $36,000 of his $5.5 million in total deductions that year were unrelated to charity or state income taxes. He added that he’s never used a “carryforward,” which allows taxpayers to deduct losses or tax credits from previous years. He pegged his unused carryforward at north of $7 billion in 2010.

Buffett clearly sees charitable donations as a reasonable way to pay fewer taxes, and has championed them in the past.

“If you want to give away all of your money, it’s a terrific tax dodge,” he quipped in response to an investor’s question at Berkshire’s annual shareholder meeting in 2010. “I welcome the questioner or anybody else following my tax dodge example and giving away their money. They will save a lot of taxes that way, and the money will probably do a lot of good.”

Buffett is also happy to keep his fortune in Berkshire stock. It signals to investors that he’s confident in his company and focused on generating long-term value, and means he has more skin in the game than anyone else. Moreover, he doesn’t feel guilty as his company’s success will ultimately benefit society.

“Many shareholders, including me, enjoy the long-term buildup in value, knowing that it is destined for philanthropy, not consumption or dynastic aspirations,” he told ProPublica.

Buffett also explained that Berkshire doesn’t pay a dividend because its shareholders overwhelmingly voted against one in 2014. They prefer Buffett to allocate Berkshire’s profits across the conglomerate and use them to buy quality stocks and businesses, instead of returning cash to them. Buffett also views buybacks as superior to dividends for several reasons, not just tax efficiency.

Buffett wants higher taxes

While some billionaires complain of excessive taxes on the wealthy, Buffett has called for higher taxes on the richest 1% of Americans, as well as changes to the tax code to prevent tax avoidance.

The investor highlighted more than a decade ago how ridiculous it was that his secretary paid a higher tax rate than him. The revelation spurred President Barack Obama to pursue the removal of tax breaks for the wealthy, and name his ultimately unsuccessful bill after Buffett. “If all the diseases have been taken, I’ll take a tax,” the investor joked at the time.

Buffett has also called for policies to reduce income inequality, such as expanding the earned-income tax credit to help workers get ahead. He once testified to Congress that estate taxes should be higher and better enforced, he told ProPublica, but his “persuasive powers proved to be limited.”

Overall, it’s not surprising that under the current tax rules, a 90-year-old who keeps his fortune in his company’s stock, and funds a simple lifestyle with a modest income, doesn’t pay a lot of tax.

It seems harsh to go after Buffett when he’s giving away virtually all of his money, calling for higher taxes on the wealthy, refusing to use several loopholes to pay less tax, and running a company where holding its stock for the long term and not paying a dividend makes perfect sense.

Read the original article on Business Insider

Warren Buffett defends himself after ProPublica says he avoids taxes

warren buffett
Warren Buffett

  • ProPublica reported this week that Warren Buffett pays relatively little income tax, despite huge gains in his wealth.
  • The investor pays minimal tax by holding Berkshire Hathaway stock and not paying a dividend.
  • Buffett pointed out that shareholders don’t want a dividend and he’s giving his fortune away.
  • See more stories on Insider’s business page.

Warren Buffett minimizes his personal tax bill by keeping his fortune in Berkshire Hathaway stock and not paying a dividend, ProPublica said in an investigative report published on Tuesday.

The billionaire investor and Berkshire CEO defended himself in a detailed statement to the news outlet, explaining that his shareholders don’t want a dividend, and saying he’s on track to give virtually all of his money to good causes.

ProPublica analyzed Buffett’s income-tax returns between 2014 and 2018 and determined that even though his wealth grew by $24 billion in that period, he only reported $125 million of income and paid just $24 million in taxes.

“No one among the 25 wealthiest avoided as much tax as Buffett, the grandfatherly centibillionaire,” ProPublica declared. It added that Buffett’s annual income of $12 million to $25 million between 2015 and 2018 was tiny; more than 14,000 US taxpayers reported a higher income than he did in 2015.

Buffett responded to ProPublica’s main assertions – that he squirrels away his money in Berkshire stock and eschews a dividend to keep his tax bill low – with 23 pages of documents. They included a written statement, as well as excerpts from several of Berkshire’s annual reports, news releases, and photocopies of newspaper and magazine stories.

The investor pointed out that Berkshire shareholders overwhelmingly prefer the company to reinvest its profits instead of paying a dividend, as they know a big chunk of the funds will ultimately go towards good causes.

“Many large shareholders, including me, enjoy the long-term buildup in value, knowing that it is destined for philanthropy, not consumption or dynastic aspirations,” Buffett said.

The investor highlighted that holders of Berkshire’s “A” shares voted 87-1 against a dividend in 2014, and “B” shareholders voted 47-1. He likely wanted to show that Berkshire doesn’t pay a dividend because the vast majority of its shareholders don’t want one, not because he wants to lower his personal tax bill.

Buffett defended his decision to keep virtually all of his fortune in Berkshire stock. The 90-year-old billionaire has pledged to give over 99% of his net worth to philanthropic causes, and has already donated about half of his nearly 475,000 “A” shares since 2006, he said.

Moreover, Buffett calculated the tax benefits from his donations to date at less than 50 cents for every $1,000 he’s given away. He also prefers to hand his cash to charities, instead of giving it to the federal government to pay off the national debt.

“I believe the money will be of more use to society if disbursed philanthropically than if it is used to slightly reduce an ever-increasing US debt,” he said.

Buffett reiterated his support for changes to the tax code that would reduce wealth inequality.

“I hope that the earned-income tax credit is greatly expanded and additionally believe that huge dynastic wealth is not desirable for our society,” he said.

Buffett attached photocopies of a Fortune cover story from 1986 to his statement. It was titled, “Should you leave it all to the children?” and included his advice on how much to pass down: “Enough money so that they would feel they could do anything, but not so much that they could do nothing.”

Read the original article on Business Insider

Warren Buffett defends himself after ProPublica says he avoids taxes and pegs his ‘true tax rate’ at 0.1%

warren buffett
Warren Buffett

  • Warren Buffett’s “true tax rate” is 0.1%, ProPublica reported this week.
  • The investor pays minimal tax by holding Berkshire Hathaway stock and not paying a dividend.
  • Buffett pointed out that shareholders don’t want a dividend and he’s giving his fortune away.
  • See more stories on Insider’s business page.

Warren Buffett’s real income-tax rate is 0.1%, and he minimizes his personal tax bill by keeping his fortune in Berkshire Hathaway stock and not paying a dividend, ProPublica said in an investigative report published on Tuesday.

The billionaire investor and Berkshire CEO defended himself in a detailed statement to the news outlet, explaining that his shareholders don’t want a dividend, and saying he’s on track to give virtually all of his money to good causes.

ProPublica analyzed Buffett’s income-tax returns between 2014 and 2018 and determined that even though his wealth grew by $24 billion in that period, he only reported $125 million of income and paid just $24 million in taxes. That put his “true tax rate” below the almost 1% paid by Amazon CEO Jeff Bezos and well below Tesla CEO Elon Musk’s 3.3%.

“No one among the 25 wealthiest avoided as much tax as Buffett, the grandfatherly centibillionaire,” ProPublica declared. It added that Buffett’s annual income of $12 million to $25 million between 2015 and 2018 was tiny; more than 14,000 US taxpayers reported a higher income than he did in 2015.

Buffett responded to ProPublica’s main assertions – that he squirrels away his money in Berkshire stock and eschews a dividend to keep his tax bill low – with 23 pages of documents. They included a written statement, as well as excerpts from several of Berkshire’s annual reports, news releases, and photocopies of newspaper and magazine stories.

The investor pointed out that Berkshire shareholders overwhelming prefer the company to reinvest its profits instead of paying a dividend, as they know a big chunk of the funds will ultimately go towards good causes.

“Many large shareholders, including me, enjoy the long-term buildup in value, knowing that it is destined for philanthropy, not consumption or dynastic aspirations,” Buffett said.

The investor highlighted that holders of Berkshire’s “A” shares voted 87-1 against a dividend in 2014, and “B” shareholders voted 47-1. He likely wanted to show that Berkshire doesn’t pay a dividend because the vast majority of its shareholders don’t want one, not because he wants to lower his personal tax bill.

Buffett defended his decision to keep virtually all of his fortune in Berkshire stock. The 90-year-old billionaire has pledged to give over 99% of his net worth to philanthropic causes, and has already donated about half of his nearly 475,000 “A” shares since 2006, he said.

Moreover, Buffett calculated the tax benefits from his donations to date at less than 50 cents for every $1,000 he’s given away. He also prefers to hand his cash to charities, instead of giving it to the federal government to pay off the national debt.

“I believe the money will be of more use to society if disbursed philanthropically than if it is used to slightly reduce an ever-increasing US debt,” he said.

Buffett reiterated his support for changes to the tax code that would reduce wealth inequality.

“I hope that the earned-income tax credit is greatly expanded and additionally believe that huge dynastic wealth is not desirable for our society,” he said.

Buffett attached photocopies of a Fortune cover story from 1986 to his statement. It was titled, “Should you leave it all to the children?” and included his advice on how much to pass down: “Enough money so that they would feel they could do anything, but not so much that they could do nothing.”

Read the original article on Business Insider

Investment income is taxed in a variety of ways – here’s how to estimate what you’ll owe and tips to minimize it

investment income
Your investment income may be taxed as ordinary income, at certain special rates, or not at all, depending on the type of investment it is and the sort of investment account it’s in.

  • Investment income can be taxed as ordinary income or at special rates, depending on the type it is. 
  • Capital gains and some dividends receive preferential tax rates. Interest and annuity payouts are taxed as ordinary income. 
  • All investments earn income tax-free while they remain in tax-advantaged accounts.
  • Visit Business Insider’s Investing Reference library for more stories.

You probably know that you have to pay taxes on just about all your income. But while the taxes on your work income is fairly straightforward – based on your tax bracket, and often automatically withheld from your paycheck – the tax on investment income can be more complex. 

Not all investment income is taxed equally.

In fact, your investments are taxed at different rates, depending on the type of investment you have. Some investments are tax-exempt, some are taxed at the same rates as your ordinary income, and some benefit from preferential tax rates.

When you owe the tax can also vary. Some taxes are due only when you sell the investment at a profit. Other taxes are due when your investment pays you a distribution. 

And finally, where you hold the investments matters. If the asset is in a tax-deferred account, such as an IRA, 401(k), or 529 plan, you won’t owe taxes on the earnings until you withdraw money from the account – or, depending on the type of account, ever.

See what we mean by complex? Never fear – here’s everything you need to know about the taxes on investment income, and the tax rates on different investments. 

What is investment income?

Investment income comes in four basic forms:

  • Interest income derives from the Interest earned on funds deposited in a savings or money market account, or invested in certificates of deposit, bonds or bond funds. It also applies to interest on loans you make to others.
  • Capital gains. Capital gains come from selling an investment at a profit. When you sell an investment for less than you paid for it, it creates a capital loss, which can offset capital gains.
  • Dividend income. If you own stocks, mutual funds, exchange-traded funds (ETFs), or money market funds, you may receive dividends when the board of directors of the company or fund managers decides to distribute the excess cash on hand to reward their investors.
  • Annuity payments. When you purchase an annuity, a contract with an insurance company, you pay over a lump sum. The insurance company invests your money, and converts it into a series of periodic payments. A portion of these payments can be taxable.

How is investment income taxed?

With so many variables, how can you estimate the tax bite on your investments? Here are the tax rates for different types of investment income.

Interest income

For the most part, interest income is taxed as your ordinary income tax rate – the same rate you pay on your wages or self-employment earnings. Those rates range from 10% to 37%, based on the current (2021) tax brackets. 

Some interest income is tax-exempt, though. Interest from municipal bonds is generally tax-free on your federal return; when you buy muni bonds issued by your own state, the interest is exempt from your state income tax as well.

Another exception is granted US Treasury bonds, bills, and notes, as well as US savings bonds. They are exempt from state and local taxes, though not federal taxes. 

Capital gains

The tax rate you’ll pay on capital gains depends on how long you owned the investment before selling it.

You have a short-term capital gain if you own the asset for one year (365 days) or less before selling it. Short-term capital gains are taxed at the same rate as your ordinary income.

You have a long-term capital gain if you hold on to the investment for more than one year before selling it. Long-term gains are taxed at preferential rates, ranging from 0% to 20%, depending on your total taxable income.

Capital gains are not taxable while the funds remain within a tax-advantaged IRA, 401(k), HSA, or 529 plan.

capital gains

Dividend income

The rate you pay on dividends from stock shares or stock funds depends on whether the dividend is qualified or unqualified. 

Qualified dividends are taxed at the same rates as long-term capital gains. Unqualified dividends are taxed at the same rates as ordinary income.

To count as qualified, you must have owned the dividend-producing investment for more than 60 days during the 121-day period that started 60 days before the security’s ex-dividend date. The ex-dividend date is the date after the dividend’s record date, which is the cut-off date the company uses to determine which shareholders are eligible to receive a declared dividend.

Annuity payments

The taxation of annuity payments is a little more complex. While you may earn interest, dividends, and capital gains within your annuity, you don’t owe any taxes on this income until you actually start receiving your annuity payouts. You only have tax due on the sums you receive each year.

What you owe also depends on whether you purchased the annuity with pre-tax or after-tax dollars. If you purchase an annuity with pre-tax dollars (by rolling over money from your 401(k) or IRA), payments from the annuity are fully taxable.

But if you purchase an annuity with after-tax dollars – that is, you didn’t use retirement account money, you only pay taxes on the earnings portion of your withdrawal. The rest is considered a return of principal (the original lump sum you paid into the annuity). 

 When you receive your 1099-R from your insurance company showing your annuity payouts for the year, it will indicate the total taxable amount of your annuity income.

Whether you pay tax on 100% of the annuity payments or only the earnings portion of your withdrawal, all annuity payments are taxed at the ordinary-income rate.

How do I avoid taxes on investment income?

Most investment income is taxable, but there are a few strategies for avoiding – or at least minimizing – the taxes you pay on investment returns. 

  • Stay in a low tax bracket. Single taxpayers with taxable income of $40,400 or less in 2021 qualify for a 0% tax rate on qualified dividends and capital gains. That income limit doubles for married couples filing jointly. If you can take advantage of tax deductions that will keep your taxable income below that amount, you may be able to avoid paying taxes on a significant portion of your investment income.
  • Hold on to your investments. Hanging on to stocks and other investments can help ensure you take advantage of preferential rates for qualified dividends and long-term capital gains.
  • Invest in tax-advantaged accounts. Interest, dividends, capital gains – almost all forms of investment income are shielded from annual taxes while they remain in one of these accounts. With a traditional IRA or 401(k), the money is only taxable once you withdraw funds from the account. Money earned in a Roth IRA is never taxable, as long as you meet the withdrawal requirements. Interest income from a health savings account (HSA) or 529 plan is not taxable as long as you use the money to pay for qualified medical or educational expenses, respectively.
  • Harvest tax losses. Tax loss harvesting involves selling investments that are down in order to offset gains from other investments. If you have investments in your portfolio that have poor prospects for future growth, it could be worth it to sell them at a loss in order to lower your overall capital gains. Many robo-advisors and financial advisors will take care of harvesting for you, trying to net out the winners and the losers.

The financial takeaway

A few tax-exempt assets aside, investment income is taxable. And it’s taxed in two basic ways: at ordinary income rates or at a lower preferential rate, generally known as the capital gains rate.

All assets accrue income tax-free while they remain in tax-advantaged accounts.

While it’s never a good idea to make investment decisions based solely on the tax implications, it is wise to consider the tax consequences of any investment moves you make. Taxes might not be the only reason you choose one investment over another, but tax breaks can be a bonus on any well-thought-out investment strategy.

Related Coverage in Investing:

Dividends are taxed in different ways – here’s how to figure what you owe on your stocks’ payouts

Interest income from your investments is taxable – here’s how to calculate what you owe and ways to lower it

Bitcoin taxes: Understanding the rules and how to report cryptocurrency on your return

Capital gains are the profits you make from selling your investments, and they can be taxed at lower rates

A variable annuity can provide you with more retirement income since its payouts rise with the stock market

Read the original article on Business Insider

Dividends are taxed in different ways – here’s how to figure what you owe on your stocks’ payouts

dividends2
Dividend income is taxable, but the rate varies, depending on how long you’ve owned the stock shares that pay the 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.
  • Visit Business Insider’s Investing Reference library for more stories.

When you invest in a company by purchasing individual stocks, mutual funds, or exchange-traded funds (ETFs), you may be rewarded with dividends. A dividend is a per-share portion of the company’s profits that gets distributed regularly to its stockholders – sort of like a quarterly bonus. 

Like most other types of investment income, the IRS deems dividends to be taxable. However, not all dividends are treated – or taxed – equally. 

Here’s everything you need to know about paying taxes on dividends.

How are dividends taxed?

A variety of unearned or passive income (as opposed to income from your work or job), dividends are subject to both federal and state taxes. For tax purposes, dividends are classified as either qualified or unqualified, depending on how long you hold the underlying shares in a US corporation or a qualifying foreign corporation.

What’s the difference? Qualified dividends meet a special holding period. That means you owned the stock issuing them for at least 60 days during the 121-day period that started 60 days before the ex-dividend date. The ex-dividend date is the day after the cut-off date (aka the “record date”) the company uses to determine which shareholders are eligible to receive the dividend.

Yeah, that definition is pretty confusing. So here’s a real-life example, sort of a timeline. 

  • Say you purchased 100 shares of IBM stock on March 1, 2020.
  • On April 28, IBM’s board of directors announced a dividend of $1.63 per share to stockholders of record.
  • They set the record date as May 8, 2020. So the ex-dividend date was May 9, 2020.
  • Since you purchased the shares more than 60 days prior to the ex-dividend date (May 9, 2020), the $163 in dividends your shares earned you are qualified. On the other hand, if you’d purchased shares on April 1, you would have owned the stock for fewer than 60 days, and the dividends would be unqualified.

How much tax do you pay on dividends?

Why do dividends being qualified or unqualified matter? Because it affects the amount of tax you pay on them. 

Unqualified dividends are taxed at your ordinary income tax rate – the same rate that applies to your wages or self-employment income. So, if you fall into the 32% tax bracket, you’ll pay a 32% tax rate on all your unqualified dividends, also known as ordinary dividends.

Qualified dividends get preferential treatment. You pay the same tax rate on qualified dividends as you do on long-term capital gains. Depending on your tax bracket, this rate can be a lot lower than your ordinary income rate.

The exact rate you pay depends on your filing status and total taxable income for the year.

capital gains 06
Capital gains tax rates.

Returning to the IBM example above, let’s assume you fall into the 32% tax bracket for ordinary income and the 15% tax bracket for long-term capital gains.

If your IBM dividends are unqualified, you’ll pay roughly $52 in taxes on your $163 of dividends. But if those dividends are eligible for qualified tax treatment, you’ll pay only $24 in taxes.

How can you avoid paying taxes on dividends?

There are a few legitimate strategies for avoiding or at least minimizing the taxes you pay on dividend income.

  • Stay in a lower tax bracket. Single taxpayers with taxable income of $40,000 or less in 2020 ($40,400 or less for 2021) qualify for the 0% tax rate on qualified dividends. Those income limits are doubled for married couples filing jointly. If you can take advantage of tax deductions that reduce your income below those amounts, you can avoid paying taxes on qualified dividends, though not unqualified dividends.
  • Invest in tax-exempt accounts. Invest in stocks, mutual funds, and EFTs within a Roth IRA or Roth 401(k). Any dividends earned in these accounts are tax-free, as long as you obey the withdrawal rules.
  • Invest in educationoriented accounts. When you invest within a 529 plan or Coverdell education savings account, all dividends earned in the account are tax-free, as long as withdrawals are used for qualified education expenses.
  • Invest in tax-deferred accounts. Traditional IRAs and 401(k)s are tax-deferred, meaning you don’t pay taxes on earnings until you withdraw the money in retirement.
  • Don’t churn. Try not to sell stocks within the 60-day holding period, so any dividends will be qualified for the low capital gains rates. 
  • Invest in companies that don’t pay dividends. Young, rapidly growing companies often reinvest all profits to fuel growth rather than paying dividends to shareholders. You won’t earn any quarterly income from their stock, true. But if the firm flourishes and its stock price rises, you can sell your shares at a gain and pay long-term capital gains rates on the profits as long as you owned the stock for more than a year.

Keep in mind: You can’t avoid taxes by reinvesting your dividends. Dividends are taxable income whether they’re received into your account or invested back into the company.

The financial takeaway

Dividend stocks can be a good way to build wealth and supplement your income, so don’t let worries over taxes keep you from investing in dividend-paying stocks. 

Still, by knowing how dividends are taxed, you can do some planning to ensure you pay as little to the IRS as possible. 

Qualified dividends benefit from being taxed at lower capital gains tax rates. And you may be able to lower the tax bite even more if you keep the high-dividend-payers in tax-advantaged accounts.

Related Coverage in Investing:

What are the best college-savings investments? 5 ways to grow your money for the ever-higher costs of higher education

Dividend yield is a key way to evaluate a company and the regular payouts from its stock

Capital gains tax rates: How to calculate them and tips on how to minimize what you owe

How to invest in dividend stocks, a low-risk source of investment income

Interest income from your investments is taxable – here’s how to calculate what you owe and ways to lower it

Read the original article on Business Insider