I've been considering selling off more of my (growth) stocks and placing the capital in dividend stocks. However, I realize Uncle Sam will tax me on any dividends I earn throughout the year. Is holding these stocks in a tax free account, such as an an IRA, the only way to avoid taxes? Will having the dividends automatically re-invested (like DRIP from TD Ameritrade) still trigger taxes? I dont want to hold the stocks longterm (~ 2- 3 years), as I already have a mutual fund.

  • 2
    Dividend re-investment does not avoid taxation of the dividends. Do you know about Qualified Dividends that are taxed at the (lower) long-term capital gains tax rate instead of as ordinary income? – Dilip Sarwate Apr 1 '14 at 14:10
  • A contradiction in terms. – user11865 Apr 1 '14 at 21:42
  • I'm not sure what you're referring to, quanty. – Derelict Apr 2 '14 at 13:24
  • Qualified dividends are not very hard to achieve. Most small investors getting 1099-DIVs from a broker will have only qualified dividends (reported on box 1b). Pub 17, ch 8 and the 1099-DIV instructions have the details. But note that in technical tax terms, even qualified dividends are still considered "ordinary income," though they are taxed at CG rates. – NL7 Apr 2 '14 at 14:27
  1. Having dividends automatically reinvested (i.e. DRIPs) will cause a tax liability for the value of the dividends.

  2. Qualified dividends (i.e. specific holding period requirements) are currently taxed at a rate lower than ordinary income tax.

  3. Yes, for normal people the way to avoid/defer paying taxes is by using a retirement account (e.g. Roth IRA/IRA/401k). There are of course plenty of legal constructs to manipulate the tax implications of any transaction.

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