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Passive income seems like an oxymoron (albeit an intriguing one): how can I earn money while doing nothing? How can anyone earn money while doing nothing?
It turns out that one way to earn money while doing nothing is by investing a sum of money in stocks and mutual funds that reap dividends. And the more you have invested as a shareholder, the bigger your dividend payouts will be.
Dividends are payments made by a corporation to its shareholders out of the profits earned. Dividend income can be in the form of cash, stocks, property, etc. However, not all stocks or mutual funds pay out dividends.
Purchasing stocks and mutual funds that pay out dividends is a great strategy in building a secure financial future for you and your loved ones.
You can do a search for dividend paying stocks and mutual funds by searching FinViz.com for free and screening for stocks with a certain percentage of dividend yield.
Whether you receive dividends payouts as cash or your dividends are reinvested automatically through a DRIP (Dividend Reinvestment Plan), your dividends are considered income to the IRS.
Qualified Dividends. However, qualified dividend income is not taxed the same as your earned income from a 9 to 5 job reported on your W2 form. For dividends to be qualified under the rules below, the dividends must:
If your dividends do not meet this qualification, then they will be taxed as normal income and subject to the standard tax rates.
Your 1099 form will show the amount of dividend income that is qualified in box 1b.
On December 17, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, which extended the changes enacted to the taxation of qualified dividends in these two acts for two more years:
The tax on dividends is similar to the long term capital gains tax rate.
Here are the dividend income tax rates:
|If Your Ordinary Income Tax Rate is…||Then Your Qualified Dividend Tax Rate for 2008-2012 is…|